Will "Tax The Rich" Save The US Economy?

Higher taxes on the nation's top wage earners could give a needed jolt to the struggling U.S. economy. Or it could be the tipping point that topples the nation back into recession. That sums up the stakes in the debate over what to do when the Bush tax cuts expire on Dec. 31, says CNNMoney.

Economic theory says that a weak economy is a bad time for a tax increase, as higher taxes slow spending and thus economic activity. But with the federal government running record deficits and some economists calling for additional stimulus, there are those who believe higher taxes are needed to fill the gap.

The Obama administration says it wants to keep the lower rates in place for most taxpayers earning less than $200,000 a year, even as rates in the top bracket are allowed to rise. Many economists, however, worry that the economy is too weak to increase anyone's taxes.

According to Mark Zandi, chief economist for Moody's Analytics:
 

• The recovery is just too fragile to raise taxes, even though the economic impact from the upper income tax cuts is low.
   
• He recommends a permanent extension of the tax cuts for the low- and moderate income wage earners, and a one-year extension for top wage earners, with a two-year phase-in of higher rates after that.
  
  According to Brian Wesbury, chief economist at First Trust Portfolios:
   
• Keeping all taxes as low as possible is always the best course for spurring the economy.
   
• Even though raising the top rates won't throw the world into a recession, it's a mistake because fewer jobs will be created and the economy will be less dynamic."
  
  Other economists argue that raising upper-income rates will hurt a broad range of workers who depend on the spending done by those with more discretionary income.
  
  Pamela Villarreal, senior policy analyst for the National Center for Policy Analysis, a free-market think tank, says while the wealthy might save more money than lower income Americans, they also buy more than their share of goods ranging from cars to restaurant meals to movie tickets.
  
  "When they stop spending money, there are plenty of lower-income people who end up getting laid-off," says Villarreal.
  
  Source: Chris Isidore, Will 'tax the rich' save the economy? CNNMoney, August 12, 2010.
  
  For text: http://money.cnn.com/2010/08/12/news/economy/bush_tax_cuts/
  
  For more on Taxes: http://www.ncpa.org/sub/dpd/index.php?Article_Category=20
  
  First published by the National Center for Policy Analysis, United States
  
  FMF Policy Bulletin/ 17 August 2010