NCPA - National Center for Policy Analysis


July 7, 2010

As the jobless recovery continues, President Barack Obama argues that the United States needs another stimulus or risks a double-dip recession.  A look behind the numbers suggests that liberal policies will hand us a double dip whether we get a stimulus or not, says Kevin A. Hassett, senior fellow and the director of economic policy studies at American Enterprise Institute. 

A major reason for the revival of sour economic news is the looming expiration of George W. Bush's tax cuts: 

  • The top marginal income tax rate is set to increase on the first day of 2011 to 39.6 percent from 35 percent; the phase-out of itemized deductions will lift that, effectively, to 40.8 percent.
  • In 2013, the 3.8 percent Obama health care tax on investment income will kick in, making the top rate 44.6 percent. 

This tax hike will push us into double-dip territory for two reasons, says Hassett.  First, it will hurt small businesses: 

  • While some of the income in the top bracket is wage and salary income of high earners, a big chunk of the money is the profit of small businesses; if you lift the top rate, you depress small-business activity, which in good times is often the engine of job growth.
  • According to the latest ADP National Employment Report, goods-producing small businesses -- those with fewer than 50 employees -- have reduced their total payroll employment by about 20,000 jobs each month this year, including in June.  

The other way the tax hike will rekindle the recession is through its treatment of dividends: 

  • Absent action by the Democratic majority in Congress, which seems increasingly unlikely, the current 15 percent top tax on dividends will rise to the top income tax rate -- 39.6 percent in 2011, which, again, will grow to 44.6 percent.
  • This massive increase will reduce the desirability of equities, significantly harming the stock market, while giving firms a powerful incentive to pay dividends this year while the rate is lower. 

There are two ways to stimulate an economy that is in trouble: with tax cuts or with increased government spending.  Declaring early and resolutely that he would extend the Bush tax cuts would have given Obama a chance to try both.  Instead, Democrats hoped that higher government spending would offset the suffocating prospect of tax increases.  It hasn't worked, says Hassett. 

Source: Kevin A. Hassett, "Ask George W. Bush How to Avert a Double Dip," American Enterprise Institute, July 6, 2010. 

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