Debating an extension of the Bush tax cuts

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Sunday, August 1, 2010

The Post asked economists and former policymakers for their opinions on the best option for the Bush tax cuts. Below are responses from Alan S. Blinder, Mark Zandi, Diane Lim Rogers, Douglas Holtz-Eakin, Leonard S. Burman and Robert Greenstein.

ALAN S. BLINDER

Professor of economics at Princeton University; vice chairman of Promontory Interfinancial Network; former vice chairman of the Federal Reserve Board

Should the Bush tax cuts be made permanent, extended for a while or allowed to lapse? Actually, I'd prefer a fourth option: that Congress had never enacted them in the first place. We couldn't afford them then (and knew it), and we can't afford them now (and know it). But we can't undo the past. Today's debate focuses on what to do about the upper-bracket tax rates, those applicable to the top 2 to 3 percent of taxpayers.

What might be the argument for retaining these tax cuts even though the long-run budget is deeply in the red? That America needs more income inequality? Seems to me we have enough. That letting the top tax rates rise would do grave damage to American capitalism? Like what happened after the Clinton tax hikes of 1993, I guess. Or is it concern about raising taxes in a weak economy? Now there's a serious argument.

Some tax-cut enthusiasts -- showing signs of latent Keynesianism -- have pointed out that all tax increases reduce spending, which is not what we want now. They're right. That's why any higher taxes should be paired with policies that more than replace the lost spending. Examples abound. We could raise unemployment benefits, as was recently done. Or boost food stamps. Or help hard-pressed state and local governments forestall layoffs of teachers, police and firefighters. Dollar for dollar, these and other options would more than offset the spending lost by letting the tax cuts expire.

MARK ZANDI

Chief economist at Moody's Economy.com

The Bush tax cuts should be extended permanently for families with annual incomes of less than $250,000 and should be phased out slowly for those making more than that.

Raising taxes on anyone now, when the economic recovery is so fragile, would be a mistake. Our fiscal problems are daunting, and tax increases will probably need to be part of the eventual solution, but if the recovery were to unravel and a new recession were to begin -- a possibility that can't be dismissed, particularly if tax rates increase -- our problems would become overwhelming.

Allowing the tax cuts for high-income households to expire over, say, a three-year period would not harm the economy. No more than 3 percent of households would be affected, and these effects would be small; the increased rates are unlikely to change decisions about working and investing. Besides, the economy performed admirably during the 1990s when upper-income households paid these same higher tax rates.

None of this is to say that the tax code should be off-limits when deciding how to fix our fiscal problems. Everything must be on the table. Past experience with fiscal austerity at home and overseas strongly suggests that it is best for the economy's long-run performance to restrain government spending rather than raise taxes. But both must be part of our national debate.

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 "middle class" 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 -- and turning the policy he has labeled "fiscally irresponsible" into his own -- 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 -- in other words, to come up with a tax plan Obama would be proud to put his name on.

DOUGLAS HOLTZ-EAKIN

Former director of the Congressional Budget Office; senior economic adviser to Republican Sen. John McCain's presidential campaign

To date, the debate over the 2001 and 2003 tax laws has been dominated by the tired rhetoric of "tax cuts for the rich." Tax policy choices must instead be guided by the twin principles of economic growth and tax reform.

The economy is growing -- it is past the crisis and past the conditions that merit so-called stimulus. But it is growing too slowly, a burden borne by millions of out-of-work Americans. In the aftermath of a severe financial crisis it would be surprising, or even unwise, to expect households to be a robust source of growth. Households should repair their damaged balance sheets as quickly as possible, while the business sector drives economic expansion.

That means that taxes on innovation, investment and competitiveness -- marginal tax rates, dividend taxes and capital gains tax rates -- should be low and predictable, especially for the small businesses taxed through the individual tax code. Temporary extensions of these rates do not resolve the uncertainty over the tax policy outlook, while actual rate increases would have an immediate economic downside and impair the long-run outlook.

As a whole, the tax code is a disaster that does not merit permanence. Tax reform is a must -- which means low rates and a broad base. Immediately raising rates and preserving an artificially narrow base -- the president's plan -- is a step away from necessary tax reform. Reform focused on growth and jobs that also raises the needed revenue must necessarily move away from targeted, boutique tax breaks and tax-based social engineering. These are a tax policy luxury that Americans -- especially the unemployed -- can no longer afford.

LEONARD E. BURMAN

Professor of public affairs at Syracuse University's Maxwell School

Max and Kathy return from a restaurant. Kathy complains, "The food was inedible!" Max nods in agreement. "Yeah. And the servings were so small. . . ." The debate about extending the tax cuts is like that old joke. Everyone knows that our income tax code is a mess. It's complex, unfair, inefficient and doesn't raise nearly enough revenue to pay for the government we want.

Most of the tax cuts enacted since 2001 expire at the end of 2010. But making those tax breaks permanent and locking in trillion-dollar deficits would be irrational.

Given the economy's fragility, however, it makes sense to extend the "middle class" tax cuts, but only for two or three years. Congress and the president should use that time to enact a major reform that would simplify the income tax code and help address our fiscal mess.

There are two reasons not to extend the tax cuts for top earners. First, they are least likely to spend those extra dollars. Thus high-end rate cuts do little to boost the sluggish economy. Second, tax reform should aim to lower rates in exchange for paring loopholes, credits and deductions. Resetting top rates at their pre-2001 levels would give Republicans reason to engage in desperately needed tax reforms. And without bipartisan participation, major tax reform will be impossible.

ROBERT GREENSTEIN

Executive director of the Center on Budget and Policy Priorities

Policymakers should let the Bush tax cuts for couples making more than $250,000 a year expire on schedule for short- and long-term economic reasons.

In the short term, as former Federal Reserve vice chairman Alan Blinder has noted, policymakers could apply the $40 billion in savings in the first year to more effective ways to boost the economy. They could, for instance: extend unemployment benefits beyond their expiration in November, giving money to people who would spend virtually all of it; extend fiscal relief for states, reducing the need for states to cut education funding, raise taxes and lay off workers (thereby weakening the recovery); or provide a tax credit for new hires, creating an incentive for businesses to hire. Any of those steps would stimulate the economy far more than continuing tax cuts for high-income people, who would save much of the money.

Long term, scrapping the high-end Bush tax cuts -- which average more than $125,000 a year for people making over $1 million -- will reduce projected deficits by about $1 trillion over the next decade (including interest costs) and more beyond. That won't solve our fiscal problem, but it will reduce it significantly. With deficits and debt due to reach unsustainable levels in coming decades, we cannot afford to extend tax cuts for people who don't need them.


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