The New York Times
August 23, 2010
A deadline is supposed to concentrate the mind. But the year-end expiration of the Bush-era tax cuts, and the November elections, are having the opposite effect.
Americans need to hear a serious debate about how the country can meet the twin fiscal challenges of supporting the weak economy now and taming the budget deficit as things improve. That debate is not happening in Washington, and it is certainly not happening on the campaign trail.
The Republicans are insisting on extending each and every one of the tax cuts forever. It is impossible to square that demand with their calls to reduce the deficit, so they do not even try.
President Obama is right when he says the country cannot afford to extend all of the tax cuts. He wants to let the tax cuts expire on the top 2 to 3 percent of American households (couples making more than $250,000 a year, individuals making more than $200,000) and permanently extend them for everyone else. The problem is that a permanent extension of the so-called middle-class tax cuts is also unaffordable.
It makes sense to extend them temporarily, because the weak economy needs the boost. But more revenue will be needed in years to come to keep rebuilding the economy and meet health care and other obligations to retiring baby boomers. That means more Americans -- and not just the rich -- are going to have to pay more taxes. For all the politicians' talk about deficits, no one is saying that.
In typical Washington fashion, Congress may dodge the deadline, say, by extending all of the tax cuts for another year or so and pretending that the politics will be easier later on. There will never be an easy time.
An honest debate needs to start with the numbers. The tax cut packages of 2001 and 2003 -- heavily skewed to high earners -- cut taxes by $1.65 trillion. In 2001, supporters argued that with the budget in surplus, the cuts were affordable. In 2003, they argued that the cuts would spur investment and growth and pay for themselves.
It has not turned out that way. Since 2002, the federal budget has been chronically short of revenue. According to calculations by the Center on Budget and Policy Priorities, if the tax cuts of the Bush years had never been enacted, publicly held debt at the end of 2009 would have been about $5.2 trillion, or 37 percent of gross domestic product. Instead, it was $7.5 trillion, or 53 percent of G.D.P. (it now stands at 60 percent).
The center estimates that if tax cuts and other current policies continue, debt would equal 90 percent of G.D.P. by 2020 -- with 20 percent of that debt attributable to forgone revenue from extending the tax cuts. The truth is, the Bush tax cuts were not affordable when they were passed and they are not affordable now.
Tax cuts for low-, middle- and upper-middle-income taxpayers should be temporarily extended because those taxpayers tend to spend most of their income and the economy needs consumer spending. That would cost roughly $140 billion next year, but the spur to the economy is more important than the budgetary impact.
Tax cuts for the rich can safely be allowed to expire because wealthy taxpayers tend to save rather than spend their tax savings. The revenue from letting these expire -- nearly $40 billion next year -- would be better spent on job-creating measures.
As the economy recovers, addressing deficits and debt will require tax reform to, finally, craft a new system that is both equitable and capable of bringing in enough revenue to pay for government.
If the middle-class tax cuts are made "permanent," as President Obama has called for, we fear Congress will never have the political will to do what is needed.
Which comes back to this year's deadline. Instead of dodging their responsibility, serious lawmakers could strike a bargain, the first of many that will be needed to put the nation's fiscal house in order. Let the high-end Bush tax cuts expire, extend the other tax cuts for another two years or so, and in the meantime, undertake tax reform. There is no time like the present.