President Obama and Republican leaders reached a deal to extend the Bush tax cuts for two years — and temporarily reduce social security payroll taxes — while extending unemployment benefits, in a deal that will add $900 billion to the deficit over the next two years. Many liberals in Congress and the blogosphere are angry, because they wanted even more wasteful government spending increases (they also wanted to block an extension of the tax cuts for upper-income households, which include most of the small businesses that create jobs), or more massive bailouts at taxpayer expense, rather than tax cuts.
As economists have noted, extending unemployment benefits will not stimulate the economy, but will cost taxpayers and businesses a lot. (It will also cost the federal government $56 billion through next year.) Michelle Malkin has explained how the extension of unemployment benefits has burdened employers by jacking up their unemployment insurance rates. Yesterday, she called the agreement between Obama and Republican leaders a“deal with the devil,” noting that between 30-40 state unemployment funds are already bankrupt or teetering on the edge, thanks to past federal extensions of unemployment benefits. That may mean increased state taxes.
Earlier, she described how generous unemployment benefits discourage people from taking lower-paying jobs, and how people are gaming the system. Giving people unemployment benefits for years on end, without scaling down those benefits, encourages people not to relocate in search of work, and not to take productive jobs that they think are beneath them, even if those jobs are the only jobs that they will realistically find once their jobless benefits come to an end, because of the disappearance of the type of job they once performed.
As the Heritage Foundation notes, “The consequences of extended unemployment benefits are some of the most conclusively established results in labor economic research. Extending either the amount or the duration of UI benefits increases the length of time that workers remain unemployed. UI benefits subsidize unemployment. They reduce the incentive unemployed workers have to search for new work and to make difficult choices–such as moving or switching industries–to begin a new job.”
The deficit is so huge that we can really only afford to extend those cuts in tax rates that actually pay for themselves through increased revenue. That includes the 2003 capital gains tax cuts, which should be extended (because they increased economic growth and tax revenue), but not the much-larger Bush income tax cuts of 2001, which increased economic growth slightly, but also drove up the deficit a lot.
Defenders of this deal will doubtless point out that liberals in Congress wanted even more costly measures that would have exploded the deficit even more (the $800 billion stimulus package crafted by liberal congressional leaders turned out to be a counterproductive waste that actually destroyed American jobs), but that’s still no excuse for this deal, which America’s finances just can’t afford.
As commentators have noted, the temporary nature of the tax cut extensions will largely cancel out any stimulus they would otherwise provide. Tax cuts are best done either permanently, or not at all.