Should the Bush Tax Cuts Be Extended for America's Wealthy?

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U.S. Treasury Secretary Timothy GeithnerDemocrats have generally supported President Obama's economic policies, but a divide may be opening between the White House and Democratic allies in Congress about whether to extend the Bush tax cuts for the wealthiest Americans.

"There's a growing chance -- above 50% -- that the Bush tax cuts will be extended for everyone," says Greg Valliere, chief political strategist for the Potomac Research Group, in a new report on the shifting political sands in Washington.

Get the Recovery on More Solid Ground

The latest defection was Sen. Kent Conrad, D-N.D., a fiscal conservative who has often spoken bluntly about the need to rein in the deficit, but who has now joined Republicans supporting an extension of the tax cuts for the wealthy. "The general rule of thumb would be you'd not want to do tax changes, tax increases ... until the recovery is on more solid ground," Conrad told reporters on Friday. He was joined by two other conservative Democrats.

Treasury Secretary Timothy Geithner appeared on the Sunday morning interview shows to appeal to Congress to extend the cuts for Americans earning less than $250,000, but allow them to phase out for the wealthiest 2% to 3% of taxpayers.

"We think that's the responsible thing to do," Geithner said, because the U.S. has got to demonstrate that it's starting "to make some progress bringing down our long-term deficits."

Tax Cuts Extended Without Offsets

But not all economists agree with the administration. Alan D. Viard, a resident scholar at the American Enterprise Institute, says he is disturbed by the political direction in which the tax cuts are extended for middle-class taxpayers without any offsets, meaning tax revenue increases or spending cuts elsewhere that would balance the continued loss of revenue.

"On the one hand we'll extend the middle-class tax cuts in full with no offset, but then we seem prepared to kill off the tax cuts at the top," Viard says. "It's just the opposite strategy of what you'd want. From an economic growth standpoint, it's the tax cuts at the top that have the most beneficial long-run impact."

Viard cited statistics from 2007 that show that taxpayers whose income was above $200,000 accounted for 80% of the capital gains and 40% of the interest income in the whole tax system. That shows that higher-income people save and invest more, fueling growth over the long run, Viard says.

The Rich Don't Live Paycheck to Paycheck

But Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, says it's precisely for those reasons that Congress needs to maintain the cuts for the middle class but end them for the wealthy.

"Unlike middle class people, high-income people don't tend to live paycheck to paycheck," Marr says. "So their spending is much less sensitive to these changes in their income."

Marr says he would prefer to take the federal revenue from ending the tax cuts on the rich, which he estimates to be about $40 billion in the first year, and give that money to the states so they don't have to cut services and raise taxes. That would have the effect of stimulating the economy more, he says.

Most of the debate in Washington is focused on extending the tax cuts for only a year or two because of the ballooning federal deficit, which will hit $1 trillion this year.

Bernanke Favors Extending Some Cuts

Federal Reserve Chairman Ben S. Bernanke said that extending at least some of the tax cuts would help strengthen the economy. "In the short term, I would believe that we ought to maintain a reasonable degree of fiscal support, stimulus for the economy," Bernanke said. "There are many ways to do that. This is one way."

Bernanke carefully avoided saying whether he supported across-the-board extension of the tax cuts or only those for the middle class. His predecessor at the Federal Reserve, Alan Greenspan, has said the cuts shouldn't be extended because of the size of the deficit.

Donald Marron, the director of the Tax Policy Center in Washington, estimates that the effective tax rate would decline by 3.1 percentage points for the top 2% of taxpayers if the cuts are extended, while going down only by 1.98 percentage points for middle-income taxpayers. The poorest taxpayers would save about $70, middle-income taxpayer would keep about $970 and the wealthiest should save an average of $8,700.

Only the Rich Benefit

"The high-income folks on average don't spend as much [of their income], so in the short run, in the Keynesian world where you think about the next year or two, the tax cuts for them are less stimulative than for others," Marron says. "But that doesn't mean there is no stimulus effect."

He also points out that while the tax benefits aimed at the middle class would flow up to higher-income individuals, the high-income tax cuts benefit no one else.

Marron says that while it's often lost in the current political debate, the long-run question of how to tax work, savings and investment is the really important tax-policy issue for economic growth in the years ahead.

"If we could settle down on what we wanted our tax system to look like, it is certainly the case that finding a way to have lower tax rates would be more conducive to long-run growth," Marron says.

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Beazley

You can't elevate the poor by bringing down the rich. In spite of the negative stigma attached to the wealthy, they contribute immensely to the their community and not just to to tax deductible organizations that offer tax incentves. They give to the needy on an individual level. Who is going to help the poor if all are poor? This mentality that the wealthy are these evil people ready to exploit everyone and anyone is just not an accurate portrayal. We really do need to stop promoting class envy. Sure, there are always the corrupt in all socioeconomic status levels of any society, not just the wealthy. Most wealthy people are very hard working people that's why they are so successful. They are kind and generous to those in need around them. They are what has made this nation what it is or at least was?

September 10 2010 at 12:29 PM Report abuse rate up rate down Reply
meleichhorn

How about getting rid of the all republicans which have cause the middle class to suffer for the last 8 years. Which also gave the rich banks ,wall street,and oil companies all the rope needed to destroy the middle class and No regulations to stop greed !!!!

September 10 2010 at 11:38 AM Report abuse rate up rate down Reply
nadair

They just imposed a 3.8% Obamacare tax on investment income (interest,dividends,rent, capital gains, etc.) above $250,000. Now more tax on the "rich"...what does income of $250k or more have to do with anything? Where did this threshold come from?

September 06 2010 at 9:30 AM Report abuse rate up rate down Reply
Edie Villarrubia

YES indeed to help our sluggish economy, please keep the extended Tax cuts at least for five years. You will be doing America and many of our citizens and non citizens a wonderful gift. God Bless America!

Edith Villarrubia

August 03 2010 at 1:56 PM Report abuse +2 rate up rate down Reply
tuley1973

What ever happpen to the fare tax across the board.... one tax for all....this is the way to correct was wrong in this country... we keep electing those rich folks in office and they in turn will take care of there own. Its time to change this old system.

July 30 2010 at 2:12 PM Report abuse rate up rate down Reply
Gumby

Some utilties give discounts to ratepayers who conserve energy. Lets use the tax cuts to reward Americans who are willing to cut down home energy consumption. America needs to conserve energy for unemployed workers. America can no longer just drill for more oil to keep workers working. Americans must save energy for businesses that need it the most so that businesses can risk more capital for growth that will require more energy. America is having trouble growing energy supplies so it mean that AMerica has no choice but to conserve more aggressively in order to free up energy supplies . America can no longer afford to pay higher prices due to supply and demand prices. Many Americans still think nothing of relying on 25,000 kilowatt central air conditioning to freeze their McMansions for just a couple of people living inside.. This is silly and insane energy policy!!!

July 29 2010 at 1:08 PM Report abuse -3 rate up rate down Reply
Gumby

It is so funny that we are lambasting at SUVs and PickUps for poor fuel efficiency while ignoring central air conditioning as equvialents of the former in so many homes. People are complaining about high utility bills and clamoring about solar rooftops while ignoring the SUV guzzling like central air conditioning. If we want to extend tax cuts , we can easily stop tax cuts and encourage all Americans to avoid relying too much on central air conditionings and instead use room air conditioners more. Iam not suggesting to do away with central air conditionings which is great for morethan several people in the house. MOst ofthehouses are occupied by a couple of people \who occupy only single rooms at any time. Central air conditionings must be avoided as much as possible!! They consumes 15,000 - 25,000 watts a hour!!!My god!!!!!!!!!!!!!!!!!!!!

July 29 2010 at 12:51 PM Report abuse -4 rate up rate down Reply
Gumby

How about giving tax credits to middle class to buy room air conditioners that can be used instead of relying on central air conditioning which consumes ten times as much electricity or more!!! The key is energy conservation... Room air conditioners are the most powerful tool in energy conservation!!! dont be soft on utilities. , give em ' hell!!

July 29 2010 at 12:30 PM Report abuse rate up rate down Reply
Gumby

HOw about giving the rich's tax cut to middle class on top ?

July 29 2010 at 11:20 AM Report abuse +2 rate up rate down Reply