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Let’s Hit the “Reset” Button on the Bush Tax Cuts

July 12th, 2012 . by economistmom

reset_button2

Bill Gale is very wise in this CNN opinion piece.  He reminds us that policymakers continue to treat the Bush tax cuts with far more love than they deserve:

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!

7 Responses to “Let’s Hit the “Reset” Button on the Bush Tax Cuts”

  1. comment number 1 by: rjs

    i’ve never llike financing consumpition as stimullus so i’ll agree with this as long as the savings are applied to real job creating stimulus such as repairing the 100+ year old sewer & water systems, most eastern cities, rebuilding the locks on the ohio river (delays are costing industry plenty), & deepening the gulf ports (which cant handle panamax container ships that will pass thru enlarged panama canal)

    with negative rate on 10 years bonds, not to do so at this time would be, as ezra put it, financial mismanagement on an epic scale…

  2. comment number 2 by: SteveinCH

    Today’s real interest rate only counts if you are planning on paying the debt back….

  3. comment number 3 by: Patrick R. Sullivan

    ‘…force policymakers who really want to continue these costly tax cuts ….’

    Costly to whom? Even using the term, ‘the Bush tax cuts’, betrays a certain prejudice.

  4. comment number 4 by: Jason Seligman

    And.. “is our congressional children learned anything” from all of the one year extensions to the AMT? Sure would help with the various uncertainty indexes that are moving north along with the VIX right now…

    Further I agree that tax and spend would stimulate especially if the spending were targeted twd high productivity public investments like the one mentioned above … sewers. Sewers are a sort of ground zero on public health, clean water, FEMA and private insurance claims due to flooding… which links thenm to globabl savings and investment markets then too.

    So you get a nice policy response to everything from from climate change to healthcare all in one Roman era technology… I say the10-year could com up a ways and this one would still be in the money. As for paying the debt back, that sure would be easier if we could “bend the cost curve” on FEMA, the ACA and residual public liability from manifest changes in the frequency of private health and home insurance underwriting insurance. Plus avoiding an insurer failure might be worth dodging another financial crisis/fiscal crisis spillover.

    Somewhere in here is a joke about things that bubble out of sewers hitting fans … the schematic diagram for this sort of humor would probably employ the word “contagion” in a double (#2) entendre as well…

    That is enough potty-nomics for one blogpost.

  5. comment number 5 by: AMTbuff

    policymakers continue to treat the Bush tax cuts with far more love than they deserve

    Policymakers continue to treat the Clinton tax increases with far more love than they deserve, especially given that Clinton’s increases broke the
    foundational agreement of the widely praised 1986 Tax Reform, poisoning any future tax reform effort.

    I would love to go back to 1986 or 1990 tax rates, with the AMT fully indexed for inflation since then, and with all tax breaks enacted after 1990 eliminated. Then we could talk about tax reform.

    However I would settle for permanent and complete indexation of the AMT for all inflation since 1993 in exchange for expiration of the post-2000 tax cuts.

  6. comment number 6 by: Jim Glass

    Six tax reforms unanimously endorsed by economists from left to right.

    http://www.npr.org/blogs/money/2012/07/18/156928675/episode-387-the-no-brainer-economic-platform

    Which would be suicide for any political candidate.

    The lesson being…

  7. comment number 7 by: Vivian Darkbloom

    There are a couple of things that exacerbate that problem. The first is the media. Good on NPR. If the media were to consistently deliver the same objective information and consistently challenge candidates on their obfuscation and rhetoric, rather than backing one faction or the other, there would be a much greater chance that public opinion would go along with that sort of platform. It does drive me nuts, though, when intelligent reporters who seem to grasp the issues somewhat spoil it be using the terms deductions and “loopholes” interchangeably. That’s a mostly rhetorical political term, but it’s nothing new, as Boris Bittker, the wise dean of corporate income tax, pointed out back in 1973:

    http://digitalcommons.law.yale.edu/fss_papers/2287/

    Alas, NPR here is the exception and the media have become much too partisan and political.

    The other problem is that economists have become much too political, particularly now that their voices are largely heard through the media (see prior para). The NPR discussion was not completely devoid of politics (e.g., a consumption tax is not hard to implement as Dean Baker was quoted as saying—it is only harder to implement if you want to combine it with *his* idea of progressivity).

    And, political campaigns are not about noting areas of agreement; they are about highlighting differences. “Politics” as the “art of the possible” only happens in smoke-filled rooms.

    But, the short answer, to complete your phrase,

    The lesson being….

    can be found here:

    http://upload.wikimedia.org/wikipedia/en/4/49/Pogo_-_Earth_Day_1971_poster.jpg