Earlier this week, President Barack Obama proposed to extend the Bush-era income tax cuts, which expire at the end of this year, for one year for people with income below $250,000. People with higher income would continue to receive all of the benefits of lower taxes on their first $250,000 of income, but the tax rate they face on income above that amount would rise.
One might wonder why we need more tax cuts, given that the Congressional Budget Office just released a study showing that tax burdens as a share of income for almost all households were the lowest in 2009 that they have been in decades and given that we face a long-term deficit problem that will require more revenues over time.
Given that the Bush tax cuts (whether all of them or even just most of them that President Obama has always wanted to continue and deficit finance) have proven unimpressive in terms of either short-term stimulus (they aren’t steered enough toward cash-constrained households) or longer-term, supply-side growth (the large deficits they cause mean national saving falls), Bill recommends this strategy (emphasis added):
A better way to stimulate the economy and move the broader debate forward would be to let all of the Bush tax cuts expire as scheduled and be considered as part of a broader tax reform and medium-term deficit reduction effort, and institute instead an explicitly temporary cut, again a payroll tax cut comes to mind.
This “reset” option strikes me as a good idea. It would finally align the current-law and policy-extended revenue baselines, and force policymakers who really want to continue these costly tax cuts to either offset their cost (such as by broadening the tax base by reducing tax expenditures) or defend their deficit financing (harder once they’re no longer status quo). Also, hitting the “reset” button makes getting rid of the Bush tax cuts perfectly consistent with Grover Norquist’s “No New Taxes” pledge (yes, really!), because: (i) letting current-law play out and the Bush tax cuts expire is not legislating a tax increase; and (ii) if policymakers then choose (even if fairly immediately and retroactively) to reenact the Bush tax cuts and offset their cost with base-broadening or other revenue increases (avoiding the status quo deficit financing), this would just be a revenue-neutral legislative action–also not a violation of the Grover pledge.
Sounds like a good plan to me!