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Tax cuts and their effect on the economy

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Kai Ryssdal: If you had to pick just two words to sum up Election 2010 so far, “tax cuts” would probably have to be pretty close to the top of the list. Specifically, whether to extend the Bush tax cuts for everyone. That’s what Republicans want. Or just for people making less than $250,000 a year, as the White House and a lot of congressional Democrats want. You’ve probably heard the GOP argument in favor of extending those cuts that raising taxes on anyone in a recession will cut off investment and stall an already-stalled labor market. Fair enough as a political bullet point. But how do they know?

We sent Marketplace’s Jeremy Hobson on the toughest assignment of the day.

Jeremy Hobson: Those in favor of extending the Bush tax cuts for everyone often cite a research paper from the year 2000. One of the authors is the conservative economist Douglas Holtz-Eakin. He says Treasury Department files show a connection between people’s tax returns and their business activity.

Douglas Holtz-Eakin: And then you can look at changes in tax rates, and the impact those changes had on capital investment.

And Holtz-Eakin says the Bush tax cuts did spur investment. But he admits other factors like financial crises or terrorist attacks can make the effects of any tax change hard to pinpoint in the data.

Holtz-Eakin: It’s not possible to trace a tax rate reduction to its impact on a specific part of the economy.

Len Burman agrees with Douglas Holtz-Eakin on that one. Burman is a professor of public affairs at the Maxwell School at Syracuse University.

Len Burman: The problem for any of these questions is you need to isolate the effect of the tax cut from all the other things that were going on at the same time. There is a little bit of research on the effect of tax rates on business decisions and that evidence is ambiguous.

In fact, some say the only thing spurring growth over the last decade was the rate on mortgages, not taxes. Bill Gale is a senior fellow at the Brookings Institution.

Bill Gale: We didn’t have a great growth decade from 2001-2010 to begin with. And to the extent that we did get economic expansion, it didn’t come from the areas of the economy that were subsidized by the Bush tax cuts.

Gale says it seems the debate that’s going on now has a lot more to do with ideology than data.

In New York, I’m Jeremy Hobson for Marketplace.

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