The Bush Tax Cuts: A Continuing Conundrum

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Bush tax cutsSigns of a compromise are increasing in Washington on extending the Bush tax cuts for all income levels. The question is: Does it make good economic sense to continue them, or is this merely political expediency?

Senate Majority Leader Harry Reid (D-Nev.) said Tuesday that he's willing to consider a temporary extension of the tax cuts for all income levels. Republican leaders said such a deal might include a renewal of jobless benefits for 2 million Americans who are about to run out of unemployment checks.

If the tax cuts aren't extended, the tax rates for all Americans will increase sharply on Jan. 1. For the middle class, the increase would be about $880 a year. For those in the top 20% of income earners, it would be an average increase of $6,094. And for those with $2 million income or more, it would be an increase of $339,473.

Restore the Taxes, Trim the Deficit


James Kwak, an economist and author of the recent book about the financial crisis, 13 Bankers, is one of the few experts advocating that the tax cuts be allowed to expire. Kwak says many politicians are talking about the national debt being the most urgent problem facing the country. If that's the case, Kwak says, the best approach would be to eliminate the tax breaks, which would save $3.7 trillion over 10 years.

Over the medium term, if the tax cuts are extended permanently, by 2020 the deficit will be 5% of GDP, "which is just too large," Kwak says. Letting the tax cuts expire will remove 1.5% of GDP from the deficit going forward, he says.

While acknowledging that there would be an "anti-stimulative effect" of raising taxes now, Kwak says the bigger problem for the middle class is that Social Security and Medicare are under attack, and the programs have now reached a tipping point.

"The conventional wisdom in Washington is shifting to 'we have to do something about Social Security and Medicare,'" he says. Removing the tax cuts would reduce the pressure for entitlement reform at a time when many Americans have insufficient savings for their old age, and that would be the best policy for the middle class.

Higher Taxes Now Would Hurt the Middle Class

Augustine Faucher, director of macroeconomics at Moody's Economy.com, agrees that a smaller future deficit might be better for the country because it would lead to stronger investment and in the end, higher economic growth. But he says the hit to middle-class incomes would be too great at a time of economic uncertainty.

"The middle class has been hurt hard by the recession, and wage growth has been weak for the past 10 years," Faucher says. "So the question is: Do you want to put an additional burden on the middle class though letting these tax cuts expire?"

As a result, Faucher says he favors extending all of the tax cuts temporarily through 2011 and then raising taxes after 2011 to close the budget deficit. Even then, he doesn't see an across-the-board tax hike.

"I think raising taxes on everyone is a political nonstarter," Faucher says. "Raising taxes on just upper-income people is a good start, but that's not going to be enough to close the budget deficit and bring it down to a reasonable level. So, you need to consider either big spending cuts or further tax increases."

He said his ideal solution would be something similar to the recommendation made last week by the co-chairmen of presidential commission on the deficit, who proposed tax reforms that broaden the tax base, lower rates and bring in more revenues.

A decision on this issue is likely the biggest challenge facing the lame-duck Congress before year-end.

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richard

I wish some expert would discuss what every almanac shows, that government tax revenues rise after tax cuts. This happened every year after the Reagan tax cuts, it happened in several years after the Bush tax cuts, and, according to what I have read, it happened after the tax cuts proposed by Kennedy went through, and after the Coolidge tax cuts. I used to see a lot of commentary on this, but I don't see any now. Is this all a right wing fantasy or what?

December 01 2010 at 5:24 PM Report abuse -1 rate up rate down Reply
rosesimet

I AGREE WITH WARREN BUFFET THAT "THE RICH SHOULD PAY HIGHER TAXES". HOW MUCH MORE CAN THE MIDDLE CLASS PAY? ENOUGH IS ENOUGH !!! OR, DOES OUR GOVERNMENT WANT EVERYONE ON WELFARE? WE BARELY CAN MAKE ENDS MEET NOW WITH EVERYTHING GOING SKY HIGH IN COST'S I.E.: INCREASED TAXES ON OUR HOMES, ETC., ETC.,ETC.. WE HAVE BEEN & ARE STILL SACRIFICING SINCE OUR MARRIAGE OF 54 YEAR'S. WE HAVE BEEN "VERY FRUGILE" IN OUR SPENDING HABIT'S AND HAVE BEEN FOR THOSE 54 YEAR'S. PRETTY SOON, EVERYONE WILL BE LIVING IN CARDBOARD BOXES. WHEN WILL IT ALL END !!! ARE WE SOCIALIST'S NOW AS RUSSIA USED TO BE- WITH THE U.S.A. NOW BECOMING A SOCIALISTIC GOVERNMENT? WE CAN NO LONGER SUPPORT THE RICH. WILL THEY EVENTUALLY HAVE TO SUPPORT US? GIVE THE GOVERNMENT BACK TO THE PEOPLE AS OUR FOUNDING FATHER'S FOUGHT FOR & GET BACK TO THE BASIC'S OR, IS IT TOO LATE? THE OLD SAYING :"THE RICH GET RICHER" & "THE POOR GET POORER":. IT IS NOTHING BUT THE: " RICH", "POWER" & "GREED". IT IS BLATANT AND NOW THROWING IT IN OUR FACES. Signed in as: Bill Simet Jr.(Korean Vet-The Forgotten War) Rose Simet's Husband. I worked my ASS off all those 54 Year's Holding 2 & 3 Job's throughout those year's & started to get comfortable. My wife still continue's to work @ age 72 soon to be 73. I am 77 year's old. I had built my education up to an electrician, then to an Independent Contractor as an Insurance Agent for 34 year's. As you can readily tell, these then were good paying job's & we supported the: "RICH" & "POOR". By the way, my wife worked with me most of the time so we could be successful. Now we're giving it two-fold back.

November 30 2010 at 8:25 AM Report abuse +2 rate up rate down Reply
joaquinabco

MADOFF'S FRIENDS SAY WHAT?

November 22 2010 at 3:15 AM Report abuse -2 rate up rate down Reply
Bill

Let me be succinct: I own a small company and I went from 3 people to 11 in part because of the Bush tax cuts. Raise my taxes and I will not hire and I will probably downsize. There are thousands of more small business owners like me. You do the math.

November 21 2010 at 7:54 PM Report abuse +1 rate up rate down Reply
Bob

There should be no Obama tax increases for anyone -- regardless of income level. The American engine of growth is fueled largely by our values of hard work and enjoying the fruits of one's own labor. Forcing any productive element of our society to work as a slave for government for 4, 5 or 6 months of the year (in NY in 2010, tax freedom day was April 23, meaning that the average New Yorker currently provides just shy of 4 months of slave labor to pay taxes) just so that the secular socialists can buy the votes of those who do not value hard work is simply immoral.

November 21 2010 at 7:24 PM Report abuse +1 rate up rate down Reply
lucyod

Puerto Rico has no state of federal taxes and we want to raise taxes again. Make the tax rates permanent and stop all the fraud and this President, Administration and his many Czars should stop spending like drunken sailors. Let them all pay into SS and take away their lifetime pension after serving only 1 term. Many programs can be revamped, cut and consolidated without touching SS and medicare. Get all illegals off our programs and no more free education for them. This would be a start in the right direction.

November 21 2010 at 5:11 PM Report abuse +5 rate up rate down Reply
Cora

What needs to happen is have the Gov't STOP spending. If they let the tax cuts expire do you think that they will "save" this money... heck no they will contintue to spend it on things that really dont help anyone or line their own pockets. Wake up & smell the coffee... tell Gov't to STOP spending and sending our money over seas !!!!!!!!

November 21 2010 at 8:15 AM Report abuse +5 rate up rate down Reply
Chip

If the media were being accurate, they'd be talking about the proposed Obama tax increases, not the Bush tax cuts.

November 20 2010 at 10:38 PM Report abuse +3 rate up rate down Reply
angiebarnes919

hell to the NO, let them expire, the jerks don't need one dime, they have obtained more wealth the last 10 time years and the rest of us get zip. NO NO NO NO they want to borrow $700 billion to pay the top 2% Hell No

November 20 2010 at 9:42 PM Report abuse rate up rate down Reply
1 reply to angiebarnes919's comment
Chip

Thief! It's NOT your money! Here's hoping you need a job and a wealthy person declines to hire you because he had to pay higher taxes.

November 20 2010 at 10:39 PM Report abuse +1 rate up rate down Reply
serranogenious

Let the tax cut expire for everyone, end wars in Afaghanistan & Iraq (saving trillions), end earmarks, and cut the Defense budget by 40%. We are in a surplus within 6 year! Note to Republicans and Tea bagnuts,thats how we get our country back!!!! By letting the tax cuts expire we will be going back to the original taxes for all under President Clinton, i seem to remember this country running exceptional under his regime.

November 19 2010 at 9:40 PM Report abuse -1 rate up rate down Reply