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What’s the Best Course on the Bush Tax Cuts?

Analysts Mark Zandi, Peter Orszag, and Howard Gleckman have all said sensible things about what would be the best policy for dealing with the expiring Bush tax cuts (which include a panoply of “middle class” tax cuts as well as cuts in marginal tax rates for the richest 2 percent of taxpayers).  Unfortunately, their smart policy analysis has been lost in the headlines generated by their actual proposals, which are colored by their political judgment about what might be achievable in today’s fractious (and fractured) Congress.

Here’s some of the good stuff:

  • Orszag: “Ideally only the middle-class tax cuts would be continued for now.”
  • Zandi: “Some people [argue] that higher taxes on the wealthy could pay for additional economic stimulus — like a bigger job tax credit or resurrected 1930s-style work programs.  This view has theoretical merit — some of my own analysis has been used to support it.”
  • Gleckman: “I wish Obama and Congress could agree on a brief extension of only those tax cuts that are most likely to boost the short-term economy.”

You would get a smart policy for addressing the current short-term jobs deficit and also make a down payment on the long-term budget deficit if you did the following:  Extend the middle-class tax cuts for a few years, let the top-rate cuts expire on schedule at the end of December, and use the revenue gains in the first year or so to pay for effective job-creating stimulus.  The middle-class tax cuts and the stimulus measures both would end once the economic recovery becomes more sure-footed.  The deficit reduction from ending the tax cuts would be permanent.

Apparently, Zandi, Orszag, and Gleckman don’t think such a policy could get enacted and have suggested compromises that include extending the high-income rate cuts.  We at CBPP have a different take.  We think that if Congress acts now to extend all of the tax cuts for two years, the political reality is that Congress very likely will continue extending all of them beyond that point — especially since the next Congress will likely contain many more tax-cut proponents than the current one and a crucial election will be coming up in 2012.

Admittedly, there’s a similar risk in extending the middle-class tax cuts:  policymakers may very well end up continuing them indefinitely.  This fact, however, underscores the importance of allowing the high-income tax cuts to expire at the end of this year and at least securing those budget savings.  That would be the right policy and would give us a fighting chance of keeping these tax cuts from coming back.  Unfortunately, we may be stuck with the high-income tax cuts for many years if we extend them and the middle-class tax cuts together for two years or a similar period of time.