When all you read is gloom, turn here for a much different perspective.

Saturday, March 20, 2010

Positive Effects of Bottom-Up, Demand-Side, Consumer Tax Cuts

Consumer spending makes up about  70% of the US Economy.

On April 1, 2009, low- and middle-income workers started seeing a bit more in their paychecks, thanks to the "Making Work Pay" tax credit in the federal recovery act. The tax credit is 6.2 percent of a taxpayer’s earned income with a maximum credit of $800 for a married couple filing a joint return and $400 for other taxpayers.  The benefit will generally be spread out over the paychecks workers started receiving in spring 2009 and will continue until the end of 2010.

Tens of billions of dollars have been pumped back into the economy through this bottom-up tax cut. Positive economic indicators have followed:

After at least a 3 year decline, Consumer Spending began to rise in April of 2009.

After a 5 year decline, GDP began to rise in April of 2009.

After a 2 year decline, the Leading Economic Index began to rise in April of 2009,
and is currently higher than at any time in over 4 years.  

Historically, the LEI is one of the most reliable forward indicators that exists.

After a dramatic 1 year increase, Job losses began shrinking in April of 2009. This has been the most rapid turn from net jobs losses to net jobs gains of any business cycle in the last century.

From its low on March 9th, 2009, the current S&P recovery began to rise in April of 2009 and has outperformed the 1974 and the 2002 rebounds over the equivalent period

What is amazing about this is that so far only about 12% of the public think they got a tax cut.  The Republicans, who all voted against this tax cut, don't want to talk about it and they seem to be creating a narrative that Obama and the Democrats have raised taxes.
Consumers indeed create jobs through demand for goods and services. No matter what your political persuasion, supporting tax cuts for working men and women seems wise -- and the results illustrated above underscore why the tax cuts in the 2009 stimulus bill got it just right.

(hat tip Dave Rusk)


  1. Whatever benefit may have been derived from that tax cut, I'm afraid the expansion of government under the Democrats and Obama will result in tax increases for many years to come (especially on those of us deemed "rich" who tend to spend the most)that will be a substantial drag on economic growth.

  2. I hear you Bill. I just don't agree. So far the effect has not been a drag at all. As the this article points out, contrary results have ensued in the last year and the positive results really have no end in sight currently...

    In terms of government expansion, the Bush administrations' expansion of the debt by expanding the department of defense dwarfs anything that has been implemented or proposed by the current party in power.

    Further, tax increases do not always follow from government expansion as the Bush administration illustrated... are you suggesting that they should have raised taxes to pay for those wars? If not, then why does it necessarily follow that any subsequent governmental bodies will necessarily raise taxes to pay for these non-war government programs?

    Debt and tax talk are completely meaningless unless you also talk about their ratio to GDP. Just like in a corporation, debt levels, and cost controls are meaningless unless you also talk about overall revenue growth or contraction.

  3. You must be kidding. The Bush tax cuts will expire at the end of 2010 for those that pay taxes. The "tax cuts" that Obama has enacted are essentially tax credits because most of those people paid little or no taxes to begin with. As far as defense costs are concerned, you know as well as I do that defense spending is a much smaller % of GDP than entitlement programs such as medicare, medicaid and social security. With the expansion of health care for "everybody" now, taxes will have to go up unless we expect to borrow it all from the Chinese.

  4. Wish I could see the charts in this post - they are not showing up.


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