Eat the Rich?

The most heated debate in Washington in the economic circle is whether or not to allow the Bush Era tax cuts for the highest earners to expire. This argument is becoming tired with the same information being thrown back and forth between liberals and conservatives. Yes, it’s true that the government shouldn't raise taxes in a recession, and yes, the government does need to control the budget deficit. It seems that we have a sticky situation here. It is almost impossible to keep taxes at the current rate and control the budget deficit at the same time without cutting spending, but even that will hurt the economy.

So what is a country to do? How can we promote economic growth while managing our budget deficit? If you said to look at the recent economic data released and follow trends to manage where fiscal stimulus is most effective, I wouldn't believe you because you would be dead on correct. As you probably know, the Congressional Budget released its quarterly report about the effects of the
stimulus package.  This information is very telling on what has been successful and what has been relatively ineffective in aiding our fragile economy.


The report has basic macroeconomic trends including employment, economic growth, etc...But the most important information lies within the section that explains the multipliers. A multiplier is an economic tool used to measure how one dollar flows throughout the economy. For example, if a tax break has a multiplier effect of 2.0, this means that every one dollar invested yields two total dollars that flows through the economy.

So what does the report tell us?

The best tool to further stimulate the economy is..... purchases of goods and services by the government (1-2.5); transfer payments to states and local governments for infrastructure (1-2.5); and transfer payments to individuals (.8-2.1. This is unemployment insurance, student financial assistance; this is not a tax break). Basically what the report tells us that government spending has been stimulating the economy over the past quarter. Are you interested in how well the tax breaks have been? For middle income earners, the multiplying effect was .6-1.5 and for high income earners it was .3-.8. An important note is that anything under 1.0 means that money is actually lost. So a tax break for high income earners actually losses money.

So does this mean we can grab our forks and knives and dig into the riches incomes? Not yet. The rich serve a very important function in the economy. They save money unlike people in the middle and lower classes. We need the people making a lot of money to save money so interest rates can stay low. After a few years when the economy settles, then we can enjoy the riches salaries.  For now, we should temporarily extend the tax cuts for two or so years, then see how the economy is doing to change our current fiscal situation.