Thursday, April 15, 2010

Bush Tax Cut Time Bomb Ticking Louder

The Times reports that Congress is preparing to deal with the scheduled expiration of the 2001 and 2003 tax cuts at the end of this year. That is, without congressional action, tax rates will increase to their pre-2001 levels (more detail in this previous post). President Obama wants to extend the cuts for households earning less than $250,000, but EconomistMom suggests he rethink his position:
For all the complaining you have done on your Senate campaign trail, and then your presidential campaign trail, and now even as President about how unaffordable and unfair and in general not very smart the Bush tax cuts were, why is it that the centerpiece of your–emphasis on your–tax policy thus far is the deficit-financed extension of the vast majority of these very same (not very smart) tax cuts?

Why do you spend over $2 trillion in your budget–the most you spend on any single policy item–on your predecessor’s tax policy, which you repeatedly explain is to blame for the deterioration and unsustainability of our nation’s fiscal outlook? Meanwhile, you took back your own ideas for new tax policy–such as the permanent extension of the Making Work Pay tax credit–because you decided to put higher standards on your own tax cuts and actually pay for them (offset their cost with offsetting revenue increases such as climate change revenues), and Congress (even your own Congress) therefore balked.

I have news for you: you’re in charge now! You aren’t stuck with the (not very smart) Bush tax cuts–not any part of them! You are the one who will have to sign an entirely new piece of legislation in order to keep any part of the Bush tax cuts after this year. You hold the reins. You don’t have to stay on the Bush path. You don’t even have to stay on the Bush tax policy horse. You can switch horses altogether and go down a better path on your better horse.

From a cyclical point of view, letting the cuts expire (i.e., increasing tax rates) next year would not be a good idea because it would reduce demand at a time when unemployment is still likely to be elevated. However, permanently extending the cuts contributes significantly to the long-term deficit (see the graph in this earlier post). A reasonable stopgap might be to extend the "sunset" of the tax cuts a couple of years while working out a "reform" that would bring revenues more in line with spending, and hopefully simplify the tax code, too. That is why I was encouraged by this, from the Times' story:

[T]he White House and Democrats in Congress have given some thought to limiting an extension of the popular middle-class tax cuts to a year or two in the hope that they can overhaul the tax code in the meantime. That also would have the effect, at least on paper, of making projected big deficits look smaller over the long run than if the tax cuts for the vast middle class were continued indefinitely — an important political consideration when the nation’s debt is building to what many economists consider dangerous levels.
On the politics, see Jonathan Chait.

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