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Bush tax cuts: Will the economy suffer if they expire?

Many Republican and Democratic lawmakers say the economy is still too fragile to let the Bush tax cuts expire this year. President Obama, however, pledged to end tax cuts for anyone earning $250,000 or more.

By Staff writer / July 29, 2010

The American flag flies at the US Capitol, Feb. 8, 2009, in Washington. Many Republican and Democratic lawmakers say the economy is still too fragile to let the Bush tax cuts expire at the end of this year.

Manuel Balce Ceneta/AP/File

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A weak economy and tight congressional elections are amplifying the stakes in a battle that was already contentious – whether to extend Bush tax cuts when they expire at the end of the year.

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President Obama wants to keep income tax cuts in place for most Americans, but taxes to rise back to 1990s rates for households making $250,000 or more. He espoused that view even during his campaign for president in 2008.

But now he faces opposition not just from Republicans but also from some in his own party, who say that with economic recovery fragile, it's the wrong time to raise taxes on anyone. At the same time, the public has become more worried about both tax hikes and high federal deficits – a mood that puts power-wielding Democrats in a tight spot for fall elections.

The looming decision that Congress must make on tax rates comes at a sensitive time for the economy. The momentum of recovery has cooled and consumer confidence has receded in the past two months. On top of that, some economists say that fiscal policies of government are starting to exert a drag on the economy, rather than a stimulus. A key reason: State and local governments are cutting spending.

Most forecasters don't see the economy falling back into recession, but they do see a real risk that could occur. Raising taxes on the rich would add a new burden, in part because wealthy Americans make a significant contribution to overall consumer spending.

At the same time, economists say that high federal deficits and a growing national debt represent a critical threat to the nation's economic health in the future. And although spending is vital to any solution, many say a fix also requires more tax revenue.

Tax policy expert Leonard Burman summed up his view of the quandary at a Senate hearing earlier this month.

"It would be a serious mistake to make any of the tax cuts permanent now," said Mr. Burman, of Syracuse University. "However, I also think it would be a mistake to allow all of the tax cuts to expire as scheduled in 2011. The economy is in a very precarious state and a major tax increase would slow the economic recovery."

The American public shows similar concerns. In a new Rasmussen Reports poll, the percentage of voting adults saying taxes are a "very important" priority has jumped recently to 68 percent, putting it near the top of voters' agenda. And 70 percent of the public views reducing the federal deficit as a top priority, according to a recent Pew Research Center poll. It's a concern that's almost equally shared by Republicans, Democrats, and independents.

Election-year pressures may cause Congress to delay action until the so-called "lame duck" session, the period after the November election but before newly elected lawmakers replacing the outgoing ones in January. That could be Democrats' best window to take a politically risky vote. But the vote could be difficult whenever it's taken.

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