I’ve thought of one way to explain why extending tax cuts for the top end is such a bad idea; it involves a bit of cheating, but in a way that doesn’t undermine the essential point.

So: let’s make two not-quite-right but not too far off assumptions. The first is that the economy will be in a liquidity trap, badly needing fiscal stimulus, for two more years. Yes, it could be more than that. But policy making for now operates on the assumption that it will be a limited period. Second, let’s assume that rich people make spending decisions based on a 10-year horizon. Making this longer would actually strengthen the argument.

Now, consider first what would happen if we extend the tax cuts for the next 10 years. This would add $700 billion to the debt (pdf). If the rich spread their windfall evenly across the decade, that’s $70 billion a year in additional consumer spending — or $140 billion during the period when we need it. So, $700 billion in deficits for $140 billion in stimulus; not a good bargain!

Alternatively, suppose we extend the tax cuts for only 2 years. That’s only $140 billion on the deficit. But the rich, knowing that it’s temporary, won’t spend much of it — if they really operate on a 10-year horizon, they’ll spend only $14 billion a year more, so $28 billion of stimulus when we need it, in return for $140 billion of debt; still a lousy bargain!

Readers who know some macroeconomics will recognize that what I’m doing here is a quick-and-dirty version of Milton Friedman’s permanent income hypothesis. Yes, that Milton Friedman.

Now, you might ask why the same arithmetic doesn’t apply to all taxpayers, not just the rich. The answer is that middle- and lower-income families are often cash-constrained, with their spending limited by their current income even if they have reason to believe they’ll be doing better in the future. High-income families are much less likely to be in that situation. As summarized here (pdf), there’s a lot of evidence suggesting that tax cuts for the rich will do less to promote spending than equal tax cuts for the middle class and below.

But in any case, it’s the tax cuts for the top 2 percent of the population, with most of the benefit going to the top 0.1 percent, that are at issue. And they’re terrible stimulus, delivering very little bang for the buck.