CBO's Analysis Of Extending The Bush Tax Cuts, Reducing The Payroll Tax And Extending Unemployment Benefits: Difficult Choices Between Current Or Future GDP Growth

On September 28, 2010, CBO Director Doug Elmendorf presented to the US Senate Budget Committee a comprehensive analysis of the macroeconomics effects on employment, GDP and the deficit of various fiscal policy choices, including full and partial, temporary and permanent, extensions of the Bush tax cuts, reductions in the payroll tax and extending unemployment benefits.

I am republishing the weblinks to that full testimony, summaries, with and without charts, and an accompanying slide show below.

Following is a quote of the key assumptions from page 5 of the full CBO report. It goes to the core of the political and economic differences between those who want the deficit reduced now and those want to reduce taxes or increase government spending now. Lowering taxes or increasing deficit spending now will increase near term demand and GDP at the expense of higher future deficits, which will crowd out future private investments and capital spending and reduce future GDP. We are in a situation in the US where current economic policies must carefully thread a needle. We need to increase current employment and GDP, but we must be very careful to choose policies that will not seriously damage future economic growth, employment and GDP as we do it.

CBO expects that economic growth in the near term will be restrained by a shortfall in demand. All else being equal, lower tax payments increase demand for goods and services and thereby boost economic activity. In contrast, the models used to estimate the effects on the economy in 2020 and later years focus on the policies’ impact on the supply of labor and capital, because CBO believes that economic growth over that longer horizon will be restrained by supply factors. All else being equal, lower tax revenues increase budget deficits and thereby government borrowing, which crowds out investment, while lower tax rates increase people’s saving and work effort; the net effect on economic activity depends on the balance of those forces.

The full testimony of the analysis, with charts, is available here.

The summary with charts from the CBO study is available here.

The summary without charts is available here.

The accompanying slide presentation is available here.