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Best of Both Worlds on High-Income Tax Cuts

Even some key members of Congress who agree that President Bush’s tax cuts for people making over $250,000 are unaffordable have raised concerns that letting them expire in December would slow the already weak economy.  Fortunately, Congress can boost short-term growth and help reduce long-term deficits:  sunset the high-income tax cuts on schedule, re-channel the near-term revenues to far more efficient ways to generate growth and jobs, and use the long-term savings to reduce the deficit.

Allowing the tax cuts for the well-to-do to expire on schedule would free up almost $40 billion next year.   Congressional Budget Office analysis suggests that using this money for a new job-creation tax credit (one that reduced a firm’s payroll taxes on new hires) and continued state fiscal assistance would deliver three times as much growth per dollar of cost as extending the tax cuts.  Former Federal Reserve Vice Chair Alan Blinder recently proposed a variation on this theme.

In fact, extending the high-income tax cuts scored dead last in CBO’s analysis of different stimulus proposals.

The reason is simple:  unlike less-affluent people, high-income people tend not to live from one paycheck to the next, so they will likely save rather than spend any additional tax cut.  Extending their tax cuts is an extremely inefficient way to address the fact that nearly one in ten Americans doesn’t have a job.

Also, if Congress extends the high-income tax cuts for a year or two, the next Congress is likely to keep on extending them, especially if (as expected) it includes many more proponents of making them permanent regardless of cost.  That, in turn, would drive up deficits and debt by about $1 trillion over the next decade alone.

In short, sunsetting the high-income tax cuts makes sense for both the short and long term.

Chuck Marr
Vice President for Federal Tax Policy