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Economist Mom

Dems fight over 3 percent of the tax deal

Congressional Democrats are making noise over the estate tax cuts, though they're only 3 percent of the total cuts. These cuts are deep and deficit-funded, but so is the rest of the agreement.

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Two points are worth stressing.

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First, there should be no professed “sticker shock” regarding the deficit impact of this agreement. Policymakers have always known, or should have known, that continuing current policies would substantially increase projected deficits. This would be true regardless of whether the tax cut extensions were limited to the “middle class” or applied more broadly. If fundamental tax reform is not undertaken soon, the $850 billion price tag of this agreement will be just a small sample of things to come.

Second, the extension of many narrow tax preferences in the Senate’s legislative version of the agreement runs directly counter to the widely praised recommendations of the President’s fiscal commission and the Rivlin-Domenici Task Force. Both groups made a strong case that scaling back or eliminating such “tax expenditures” could be used to build a more efficient system for revenue collection, lower rates and also raise needed revenue. Ignoring this advice, as the agreement clearly does, is a discouraging signal that business-as-usual in Washington has not yet been altered.

Whether this deal is fiscally responsible will ultimately be determined by what Congress does prior to the expiration dates of its main components. Ideally, these short-term policies will give Congress and the President time to consider fundamental tax reform along with the bi-partisan suggestions from the President’s fiscal commission for long-term spending restraint.

The sooner we can break out of the box from our current patchwork of tax-cut sunsets and tax expenditures and replace these policies with a more efficient, more permanent, and more responsible tax policy, the easier it will be to break out of the short-termism affecting the rest of the nation’s fiscal policy.

The outpouring of credible plans from partisans and policy wonks in response to the work of the President’s commission has made clear that nearly everyone in Washington longs to fundamentally transform the tax code — making it the most sensible area for the nation’s leaders to immediately begin our long march towards responsible budget policy.

I remain optimistic that a temporary extension of all of the Bush/Obama tax cuts is better than a permanent extension of any part of them, in increasing our chances that we will “trade up” to a better and more fiscally responsible federal tax system in the next couple years.

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