News & Updates

Bush tax cuts for the rich must go

8.24.2010-Financial Times

Congress can kill two birds with one stone when President George W. Bush’s tax cuts expire in December. It can – and should – extend cuts for strapped middle-class families while America digs its way out of recession. It should also let the tax cuts for the wealthiest 2 per cent of households expire, as a wide range of economists recommend, to make a sizeable dent in the nation’s unsustainable longer-term budget deficits.

Our leaders face the enormous challenge of navigating economic policy through a narrow channel. The president and Congress must provide near-term support for an economy still struggling to recover from a devastating recession, while simultaneously addressing longer-term structural budget deficits. Extending the middle-class tax cuts but permitting tax cuts for the wealthy to expire on schedule supports both goals.

Yet some conservatives, many of whom cite red ink to oppose emergency measures such as a temporary extension of unemployment insurance that would hardly affect longer-term deficits, are threatening to block the extensions of middle-class tax cuts unless Congress also includes about $750bn in tax relief over the next decade for the top 2 per cent of earners, whose average annual income is $800,000. Unfortunately, a few centrist Democrats are joining the conservative stampede to extend the Bush tax cuts for this sliver of households.

Those who think this would be good for the country should think twice. It threatens the nation’s fiscal health. Extending high-income tax cuts would signal to financial markets that our political system is incapable of comprehending, let alone beginning to address, our long-term debt problem. Allowing these tax cuts to expire, on the other hand, would shrink deficits and debt by about $830bn over the coming decade. Moderates considering a temporary extension of the high-end tax cuts should remember that if such an extension is enacted, the next Congress – which will include more proponents of making all the Bush tax cuts permanent – will likely extend the tax cuts again, setting the stage for them ultimately to be made permanent.

In spite of the blow to fiscal discipline, some argue that extending tax cuts for the top 2 per cent is critical for creating jobs and sustaining recovery. Yet the Congressional Budget Office ranked extending these cuts dead last out of a range of options for boosting the economy. CBO analysis indicates that just $13bn in state fiscal relief is more effective than the $40bn price tag of extending the high-income tax cuts for a year.

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