海角大神

Why arguments for extending the Bush tax cuts are misguided

The argument for extending the high-end tax cuts have gone wobbly. It would be more convincing if the Republican line were something other than 鈥渘o new taxes, ever.鈥� The economic and fiscal circumstances may change, but the prescription remains the same.

It鈥檚 a big 鈥渞ag on the Bush tax cuts鈥� week in the Washington Post鈥揑 think because this is one of the biggest looming issues Congress and the Administration will be coming back to after August 鈥渞ecess.鈥�

It began with , where she wrote:

鈥�Which takes us back to the matter of whether it would be risky to let any of the Bush tax cuts expire. As a practical matter, Democrats and Republicans agree that the cuts should remain in place, at least temporarily, for families making less than $250,000 a year. That鈥檚 a debatable point. Former Federal Reserve Board chairman Alan Greenspan, whose blessing was responsible for propelling the tax cuts forward in the first place, .

The real disagreement is over extending the high-end tax cuts, and on this even some supposedly fiscally responsible Democrats 鈥� I鈥檓 talking to you, Kent Conrad 鈥� have gone wobbly. The no-new-taxes-now crowd cautions against raising taxes in a recession 鈥� a fair point, except that there are more efficient ways to spur the economy than giving more money to those least likely to spend it. Alternatively, they cite 鈥� and inflate 鈥� the supposed impact on small business of raising the upper-end rates.

This would be more convincing if the Republican line were something other than 鈥渘o new taxes, ever.鈥� The economic and fiscal circumstances may change, but the prescription remains the same. And the patient is too ill to tolerate another dose of this quack medicine.

And in the Sunday paper (already available online as of Friday), the Bush tax cuts are the focus of the 鈥�5 Myths鈥� series as well as 鈥�Topic A.鈥� Bill Gale of the Brookings Institution writes about . My favorite myths of the five are #1 (on the tax cuts as 鈥渟timulus鈥�) and #5 (on the effect of the tax cuts on the longer-term fiscal outlook)鈥揵ecause Bill argues there鈥檚 not much to 鈥渓ove鈥� in either case:

1. Extending the tax cuts would be a good way to stimulate the economy.

As a stimulus measure, a one- or two-year extension has one thing going for it 鈥� it would be a big intervention and would provide at least some boost to the economy. But a good stimulus policy can鈥檛 just be big; it should also offer a lot of bang for the buck. That is, each dollar of government spending or tax cuts should have the largest possible effect on the economy. According to the Congressional Budget Office and other authorities, extending all of the Bush tax cuts would have a small bang for the buck, the equivalent of a 10- to 40-cent increase in GDP for every dollar spent.

Why? As the CBO notes, most Bush tax cut dollars go to higher-income households, and these top earners don鈥檛 spend as much of their income as lower earners. In fact, of 11 potential stimulus policies the CBO recently examined, an extension of all of the Bush tax cuts ties for lowest bang for the buck鈥�The government could more effectively stimulate the economy by letting the high-income tax cuts expire and using the money for aid to the states, extensions of benefits and tax credits favoring job creation鈥�

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5. Continuing the tax cuts won鈥檛 doom the long-term fiscal picture; entitlements are the real problem.

One theory holds that the country鈥檚 long-term budget shortfall is 鈥渏ust鈥� an entitlements problem, the result of rising costs associated with growing Social Security rolls and increased health-care spending (via Medicare and Medicaid). Republicans like this idea because it plays down tax increases as a potential solution. Democrats like it because it makes the recent seem like even more of a triumph.

But it just isn鈥檛 true. The deficits we face over the next decade reflect a fundamental imbalance between spending and revenue, one that goes beyond entitlements. Based on projections by the CBO, Alan Auerbach of the University of California at Berkeley and myself, among others, even if the economy returns to full employment by 2014 and stays there for the rest of the decade, the continuation of current fiscal policies, including the Bush tax cuts, would lead to a national debt in the range of 90 percent of GDP by 2020. That鈥檚 already the highest rate since just after World War II 鈥� and Medicare, Medicaid and Social Security aren鈥檛 expected to hit their steepest spending increases until after 2020.

According to these same projections, the yearly deficit would rise to 6 to 7 percent of GDP by 2020. The Bush tax cuts would account for a significant chunk of this, considering that in each year they are in effect, the revenue lost because of them amounts to nearly 2 percent of GDP.

Compounding the problem: By increasing the government鈥檚 debt, the tax cuts have already led to higher interest payments on that debt. So even if all of the cuts expire on Dec. 31, we will still be paying for them for years to come.

And under it seems that no matter where fiscal policy economists fall on the ideological spectrum, it鈥檚 hard to find one who thinks permanent extension of all of the Bush tax cuts is a good idea. My response (just because this is my blog):

DIANE LIM ROGERS

Chief economist at the Concord Coalition and blogger at EconomistMom.com

President Obama will find it very difficult, if not impossible, to simultaneously keep two major policy promises: maintain the generously defined 鈥渕iddle class鈥� portions of the Bush tax cuts and begin to restore fiscal sustainability by reducing the deficit to 3 percent of gross domestic product by 2015.

At the same time, current economic conditions suggest a continued need for deficit spending to assist in the recovery. Even if the Bush tax cuts are far from the most effective form of additional fiscal stimulus we could come up with, it may be all we can get right now, politically.

So one way Obama can avoid simply rubber-stamping the Bush tax cuts 鈥� and turning the policy he has labeled 鈥渇iscally irresponsible鈥� into his own 鈥� while saving face on his promises would be to temporarily extend only those portions of the cuts he has proposed to permanently extend in his past two budgets. A one- or two-year extension would buy time for the economy to further recover, while providing policymakers with a realistic deadline to permanently reform the tax system to raise adequate revenue in a more efficient and equitable manner 鈥� in other words, to come up with a tax plan Obama would be proud to put his name on.

And in the informal survey of readers conducted on the , as of Saturday 6 pm, 57 percent of respondents (out of nearly 1000) said we should let all the Bush tax cuts expire as scheduled. (Snapshot above.)

UPDATE (Saturday night): on the issue. (Thanks to Len Burman for calling this to my attention via Facebook.)

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