The Agenda

Howard Gleckman and Alan Viard on Extending the Bush Tax Cuts

As I’ve written in this space before, I think we need a comprehensive reform on the tax code. The debate over extending the Bush tax cuts strikes me as far less important than the debate over the tax code we need to create a more flourishing economy. I’d rather we let the Bush tax cuts expire and create a credible plan to cut cost growth in Medicare and Social Security, federalize and streamline Medicaid, consolidate federal spending across the board, and replace the income tax with a growth-friendly consumption tax. There is no such thing as a “permanent” tax cut, as Howard Gleckman explains:

A ‘permanent” tax cut is a fiction. No tax cuts are forever. Congress amends the Internal Revenue Code annually, and sometimes more than once a year. Since World War II, it has done a major overhaul about once a decade, and is overdue for its next renovation. And given massive budget pressures, one is likely to come sooner rather than later.And when it does, the entire Code will be in the mix, notwithstanding what it permanent and what is not.

At the same time, our recent experience with four dozen allegedly time-limited tax cuts that Congress extends more or less routinely each year suggests the word “temporary” does not carry the same meaning in Washington as it does elsewhere. 

Gleckman favors letting all of the tax cuts expire as a down payment on addressing long-term fiscal imbalances. He also says that he prefers the Orszag-Boehner approach of extending all tax cuts for two years to President Obama’s push for letting the over-$200,000 tax cuts expire while “permanently” extending the under-$200,000 tax cuts:

By offering a two-year extension of the 2001 and 2003 tax cuts, Boehner can make the 10-year cost of continuing the tax cuts for high earners look like a relatively modest $75 billion, far less than the than the $700 billion, 10-year price tag of a permanent extension. By contrast, making tax cuts permanent only for those making less than $200,000 forces Congress to build the $3 trillion, 10-year cost of Obama’s plan into future budget baselines, while keeping tax cuts for high-earners out. The result: If the GOP does take control of Congress, it will have to scramble to find the money to pay for restoring tax reductions for those in the top brackets, or explain why it is “busting the budget” to do so.

Btw, it is important to note that while both Boehner and Orszag would both extend all the tax cuts for a couple of years, their long-run proposals differ profoundly. Orszag would let all the Bush-era tax cuts die after 2012. Boehner, by contrast, would not.

As Gleckman goes on to argue, the president’s approach encourages the illusion that we can address long-term fiscal imbalances by raising taxes on high earners:

But my biggest objection to the Obama plan is that is manipulates expectations. It implies that the nation can solve its budget problems by simply raising taxes on the wealthy. But this is not possible. As a recent Tax Policy Center study showed, even trying to do so would result in top rates approaching 80 percent. One day, a president and Congress will have to agree on a deficit reduction package that raises taxes across the board and cuts spending. That’s when those allegedly permanent tax cuts will disappear. Pretending otherwise is irresponsible.

My view is that any deficit reduction package must rely far more heavily on spending cuts than on tax increases, and that the tax increases will have to be levied on consumption. 

If we did indeed let the Bush tax cuts expire, there is a chance that pro-growth conservatives could make a clear, unfettered case for a better tax system. Alan Viard has a superb column on the conservative failure to defend the high-income rate reductions in the Bush tax cuts of 2001 and 2003:

Over the last nine years, the high-income rate reductions have been the neglected stepchild of the tax cuts. The Bush administration downplayed these reductions when the 2001 tax cut was adopted, and supporters have generally failed to make the growth case for them. Most defenses of the high-income rate reductions continue to rely on misplaced arguments about small-business aid and Keynesian demand stimulus. These arguments solidified political support for the initial passage of the tax cuts, but impeded the establishment of lasting pro-growth tax policy. Laying a firm foundation for sound tax policy will require bringing the neglected stepchild in from the cold and making the economic-growth case for the high-income rate reductions.

I definitely agree with Viard that conservatives need to defend low marginal tax rates. And I’ve been very frustrated by the wrong-headed use of Keynesian demand stimulus arguments for maintaining the high-income rate reductions, which Viard dispatches with in his piece:

The Congressional Budget Office recently concluded that permanent extension of the Bush tax cuts would provide only a small stimulus to aggregate demand, while carefully noting that the “long-term effects on work incentives and investment” were a separate matter. Unfortunately, many opponents of the high-income rate reductions ignore this critical distinction, pointing to the limited demand stimulus as proof that the reductions offer little economic benefit and never discussing the impact on incentives and long-run growth. To rebut such arguments, supporters of the rate reductions must emphasize long-run growth rather than short-run stimulus.

In any case, the Keynesian argument would justify only a temporary extension of the high-income rate reductions. The purpose of Keynesian demand management is to stabilize the business cycle by boosting demand when the economy is weak and restraining it when the economy is strong, a separate goal from promoting long-run growth. Demand stimulus should be temporary and tied to the business cycle, while marginal-tax-rate reductions should be permanent. [Emphasis added.]

To the extent our goal is to improve the deficit picture, it is far from obvious that rolling back high-income rate reductions is the right strategy:

The administration’s professed commitment to fiscal responsibility is also inconsistent with its willingness to accept a revenue loss of roughly $1.9 trillion from extending the middle-class tax cuts. This double standard is also reflected in the February 2010 pay-go budget law, which exempted most of the middle-class tax cuts but not the high-income rate reductions, from the requirement that revenue losses be offset. Alan Greenspan and others have recently recognized that deficit concerns should be considered before deciding to extend all of the middle-class tax cuts permanently. It clearly is possible to fashion a package that extends most or all of the high-income rate reductions along with some of the middle-class tax cuts while keeping the total revenue loss at, or even well below, the level that the administration views as acceptable. Some factor other than the deficit explains the administration’s unwillingness to extend the high-income rate reductions.

Yet it’s clearly true that retaining high-income rate reductions while rolling back middle-income rate reductions is not likely to be a political winner. That’s part of why the right would be better served by making an affirmative case for a new tax code that actually lowers marginal tax rates while eliminating deductions and other disincentives and distortions.

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