|Debating an extension of the Bush tax cuts
WaPo / 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
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
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
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.
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,
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.
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
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
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
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.