Thursday, September 30, 2010

Maybe Let the Bush Tax Cuts Expire?

Republicans used the Congressional mechanism of reconciliation to pass the Bush tax cuts. Reconciliation required that the tax cuts automatically expire on January 1, 2011. This is the law.

Democrats want to extend the Bush tax cuts for families making less than $250,000 (singles under $200,000). Republicans want those making over $250,000 included in the extension (never mind the merits or arguments of either side). But Members of Congress in both parties that voted for the Bush tax cuts knew the day of reckoning would arrive on January 1, 2011, now just three months away.

What’s different in 2011 as against 2001? For one, annual budget deficits are in the trillions, not hundreds of billions. For another, the public debt is approaching dangerously high levels, especially if interest rates should rise in the next few years and increase the cost of debt service.  Extending the cuts would add trillions more to the deficits and debt.

Perhaps we should let the law takes its course and see what happens. After all, those who predicted doom and gloom from the 1993 Clinton tax increases were wrong. Those who predicted that the economy would prosper due to the Bush tax cuts failed to foresee the Great Recession. Who can absolutely guarantee that letting the Bush tax cuts expire will spell Armageddon? The same people who warned that Clinton’s tax increases spelled disaster, when, in fact, they were followed by a stock market boom and budget surpluses?

Sure, other factors affect economic activity (e.g., monetary policy, labor markets, regulation, etc). But this is exactly the point.  A singular focus on increases or decreases in marginal tax rates, to the exclusion of other economic factors, does not necessarly result in hard times or prosperity.
 
Besides, extending the Bush tax cuts will remove pressure for real tax reform (e.g., the flat tax).

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