What To Do With the Bush Tax Cuts?
This morning, Peter Orzsag — until recently, the head of the White House’s Office of Management and Budget — made waves by publishing a New York Times opinion piece calling for the extension of the Bush tax cuts for all earners for two years. After that, he says, the tax cuts should expire for all Americans.
[T]he best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.
Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.
Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets don’t seem at the moment to view the budget deficit as a problem — take a look at the remarkably low 10-year Treasury bond yield — there is little reason not to extend the tax cuts temporarily.
A benign bond market, however, is a luxury we won’t enjoy forever if we fail to tackle our long-term fiscal problem. What’s more, losing the confidence of the bond market could prove painful, since it is widely known that our fiscal trajectory is unsustainable and market sentiment may therefore shift quickly and unpredictably. In any case, as the economy recovers, the dominant problem will move from depressed demand to excessive budget deficits.
This is in contravention to the administration’s chosen policy — letting the Bush tax cuts expire for the wealthiest Americans, bringing the top marginal rate up to 39.6 percent, and making permanent the middle-class tax cuts.
Either way, Congress is set to battle out what to do with the cuts when it returns next week. All of the cuts are due to expire Jan. 1, 2011, unless Congress intervenes. Brian Beutler at Talking Points Memo has a good round-up of the likely options and their political chances.