Unemployment Insurance, tax credits for working families, boost economy much more than high-income tax cuts

The federal legislation that extends Unemployment Insurance for people looking for work, along with the extension of improvements to tax credits for low-income working families, are expected to produce far more “bang for the buck” in terms of economic growth than the extension of tax cuts for high-income households. These findings come from a recent analysis by Mark Zandi, chief economist for Moody’s Analytics.

The Congressional Budget Office (CBO) and many economists have previously found that in a weak economy, Unemployment Insurance and refundable tax credits, such as the Child Tax Credit and the Earned Income Tax Credit, provide much more of a boost to economic activity and job creation compared to tax cuts aimed at high-income individuals. That’s because those who are hard-pressed by the ailing economy are more likely to spend any income received. According to the Moody’s Analytics model, every dollar spent on Unemployment Insurance generates $1.60 of additional economic activity, the Child Tax Credit generates $1.38, and the Earned Income Tax Credit generates $1.24.

Bang for the Buck chart

Fiscal Stimulus Multipliers

In contrast to these timely and targeted provisions, the extension of the 2001 and 2003 tax cuts to high-income households will provide only a minimal boost to the economy, yet greatly increase the size of the federal deficit. For example, the Moody’s Analytics model estimates that making the tax cuts permanent only generates 35 cents of new economic activity for every dollar of tax cuts.

 Zandi finds that the extensions of Unemployment Insurance, the Child Tax Credit and the Earned Income Tax Credit, along with a payroll tax reduction, will be responsible for nearly all of the positive impact of the legislation, generating almost all of the economic growth (1.1 of the 1.2 percent boost to the economy expected from the legislation), almost all of the increase in payroll employment (1.4 of the 1.6 million increase in jobs) and nearly all of the decline in the unemployment rate (1.1 of the 1.2 percent-point reduction).

Considering the fiscal challenges facing our nation, policymakers should focus their efforts on the most effective provisions to support the fragile economic recovery.

 

by Steve Francisco, federal policy director for the Minnesota Budget Project.