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POLICY INSIGHT
BEYOND THE NUMBERS

Inconsistency and Flawed Economics on Taxes

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Senior Director of Federal Tax Policy

In the current debate over federal taxes, all eyes are focused on what to do about President Bush’s expiring tax cuts for high-income people.  Proponents of these tax cuts, mainly but not solely Republicans, argue that letting the cuts expire on time amounts to a tax increase — and, with the economy still very weak, now is not the time to raise taxes on anyone, wealthy or otherwise. But, by their own definition of a tax increase — that letting tax cuts expire on schedule amounts to one — many of these proponents of extending the high-end tax cuts are proposing their own tax increase on the other 95 percent of working Americans. As part of the 2009 Recovery Act, Congress enacted President Obama’s proposed Making Work Pay tax credit on a two-year temporary basis, boosting the annual paychecks of two-earner, middle-income families by $800.  Making Work Pay is slated to expire at the end of this year.  If it does, middle-income people will pay higher taxes in 2011 than in 2010. In his new tax plan, Senate minority leader Mitch McConnell proposes to extend all of President Bush’s expiring tax cuts, including those for people at the top, but not the Making Work Pay credit.  Based on his own standard, that amounts to no tax increase for those at the top, but a tax increase for everyone else.  This suggests he may view letting a Bush tax cut expire as a tax increase but not letting an Obama tax cut expire. Proponents of extending the high-end Bush tax cuts say that, with the economy still weak, we should not raise taxes on anyone because that would slow consumer spending, cost jobs, and further impede growth.  In fact, however, high-end people tend to save much of any tax cut they get because they don’t have to spend the additional money to meet the basics.  In contrast, middle- and lower-income people live paycheck to paycheck to a greater degree and spend most of what they have to feed their families, pay the mortgage or rent, and cover other expenses. That’s why the Congressional Budget Office found that, on a dollar-for-dollar basis, extending the Making Work Pay credit would have more than double the positive impact on a weak economy than extending the high-end Bush tax cuts would.  Extending the high-end tax cuts simply doesn’t make sense, either temporarily or permanently, given their large cost. Extending the Making Work Pay credit on a permanent basis is not affordable.  But if we’re interested in reviving the economy, we should try to avoid taking money in the next year of so out of the hands of people who are likely to spend rather than save a large share of it.  By proposing to extend the high-end tax cuts while letting the Making Work Pay credit expire, Senator McConnell not only is inconsistent about what constitutes a “tax increase,” but also has the basic economics backwards.