Monday, August 23, 2010

Why Extending the Tax Cuts for High Earners Makes Little Sense for Mailers

Currently there is a major argument over whether the Bush tax cuts should be extended for those  earning high incomes.  The argument is being fought on traditional left-right, Democratic-Republican lines. 

While some argue that raising rates on the highest earners will hurt job creation, I am not persuaded by that argument for three reasons.   First, it is not clear that the increase in marginal rates will affect the willingness high-income earners to work especially when individuals face real concerns about the risks they face in order to generate income now until they retire.   Second, the deleveraging of America means that marginal increase or decrease in income has a lower impact on spending than in times when consumers were willing to borrow heavily to expand their ability to spend.  Third, the increase in savings rates has not seen growing investments in the private sector but growing investments in Treasury bills and other government securities.   In essence, by continuing the tax cuts we are giving individuals money that they lend to the Federal Goverment to pay for the tax cut.   What is missing is the expected gains in output, spending, and private investment that tax cuts normally are expected to produce.

But whether you agree with my argument on the economic impact of extending the tax cuts or not it is clear that extending the tax cuts is bad for the mailing industry.   Why?  Because extending the tax cuts increase the projected deficit.  The higher the projected deficit, the stronger the headwinds against fixing the Postal Service's retiree cost issues are. The mailing industry can ill afford any additional budget related challenges now as the ones they now face are more than sufficient.

No comments: