Extending the Bush tax cuts wouldn't help the economy

Wednesday, July 28, 2010

THE TAX CUTS passed under President Bush are about to expire. The deficit is at a once unimaginable level. In a saner political environment, that would counsel revisiting the sustainability of all the tax cuts. Certainly, given the yawning debt, there is no reason to extend the tax cuts for the wealthiest Americans. But here is the worrisome development of recent days: Several ordinarily deficit-hawkish Democratic senators, including Budget Committee Chairman Kent Conrad of North Dakota -- have suggested that the current economic slowdown justifies temporarily renewing all the tax cuts, even for upper-bracket earners. Expressing similar concerns were Evan Bayh (D-Ind.), Ben Nelson (D-Neb.) and Joseph I. Lieberman (I-Conn.).

"As a general rule, you don't want to be cutting spending or raising taxes in the midst of a downturn," Mr. Conrad said. "We know that very soon we've got to pivot and focus on the deficit. But it probably is too soon to cut spending or raise taxes." As a general rule, what Mr. Conrad said is correct. In its particular application -- raising taxes on the highest-income earners, households making more than $250,000 annually -- he is dead wrong.

Analyzing the best bang-for-the-buck policies to stimulate the economy, the Congressional Budget Office found that the least effective was extending tax cuts for the top brackets. The reason is obvious. "The higher-income households . . . would probably save a larger fraction of their increase in after-tax income," the CBO said.

Yes, you say, but what about small business? "Increasing the after-tax income of businesses typically does not create much incentive for [small businesses ] to hire more workers in order to produce more, because production depends principally on their ability to sell their products." In other words, if you're worried about the fragile state of the economy and you want to do something to make sure recovery is not set back, there are any number of more effective ways to spend that money. Continuing to help states pay their Medicaid bills would be one.

A temporary extension of the upper-income tax cuts would be the worst of both worlds. In the short term, it would be ineffective as an economic stimulus. In the long term, it would add to the deficit. A two-year extension would cost about $75 billion, but the bigger risk is that a temporary extension would morph into a permanent one, at a 10-year cost of $678 billion. Thankfully, the Obama administration appears to be sticking to its guns; Treasury Secretary Timothy F. Geithner said the other day that the state of the economy does not justify extending the tax cuts for the wealthy. He is correct. Those truly worried about the nation's dire fiscal picture should seize this moment to lock in those substantial, badly needed, savings.

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