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Economist Mom

Let's not do the crazy thing with the Bush tax cuts

How can leaders proclaim their intent to get our fiscal house in order, while arguing to keep (forever) the fiscally-reckless and economically-ineffective Bush tax cuts?

By Guest blogger / December 2, 2010

As the deficit climbs, does it make sense to spend 2 billion dollars on middle class tax cuts, let alone 3 billion to include the wealthiest?

Illustration by Clay Bennett / The Christian Science Monitor

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I am no longer going to “let the perfect be the enemy of the good.” I am no longer going to try to talk people into seeing that the “right” thing to do with the Bush tax cuts would be to let them all expire. (The even “righter” thing would have been to never have enacted them in the first place.) I am just going to urge the policymakers to avoid doing something with the Bush tax cuts that seems totally contradictory to the fiscal policy goals–both shorter-term and longer-term–that they claim to have. In other words, let’s try to avoid doing something with the Bush tax cuts that seems totally crazy given what we say our fiscal policy goals are for both adequately supporting the (still fragile) short-term economy and better encouraging economic growth by reducing the deficit over the longer term.

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The fiscal policymaking in this town seems totally schizophrenic right now. What a juxtaposition to have President Obama’s deficit-reduction commission release its final report while the Administration “negotiates” with Congress on whether all of the Bush tax cuts, or just most of them, should be permanently extended (and deficit financed). The media has been reporting that whether the bulk of the Bush tax cuts will be extended or not is not the issue–it is whether the upper-bracket ones benefitting only the rich will be included as well, and what constitutes “rich.” (That floor may be moving up all the way to $1 million.)

Let’s remember that the permanent extension of “just” the “middle-class” Bush tax cuts, as President Obama has proposed, would add about $2.2 trillion to the debt over the next ten years–without interest costs and without the associated extension of Alternative Minimum Tax relief. Such extension would preserve the full value of Bush tax cuts for 97-98 percent of households while continuing to give the largest dollar value of tax cuts to those above the $250,000 threshold. (That’s because those in the upper tax brackets have income that passes entirely through the lower brackets.) Extending the upper bracket cuts along with the rest would raise the ten-year cost to close to $3 trillion (again, without interest). So the Administration and Congress are debating over whether we should commit to over $2 trillion, versus closer to $3 trillion, in deficit-financed Bush tax cuts.

Meanwhile, the President’s fiscal commission has recommended that federal revenues be increased as part of a package of policy changes that would get deficits down to economically sustainable levels by 2015 and beyond. Yes, it’s a package that is heavier on the spending-cut side than on the tax-increase side. Yes, it’s a tax proposal with a Republican-oriented goal of keeping marginal tax rates low, in fact, lower than Reagan-era tax rates. But the revenue increases come from broadening the tax base in ways that reduce tax preferences for higher-income households more than lower-income ones, preserving or even increasing the overall progressivity of the tax system while making the tax system more efficient. And the central message on tax policy from all of the various commissions, task forces, and study groups that have reported recently is pretty simple: beyond the next couple years, we need more revenue, not less.