Extending the Tax Cuts: The Possibilities Are Endless!

Really they are. With the 2001/2003 tax cuts set to expire in five months, the topic is coming up with increasing frequency. Unlike with the estate tax expiration this year, it appears that Congress will not simply let political inertia and gridlock take its course this time.

The course of action favored by the president is to permanently extend the tax cuts for families making less than $250,000 and let the ones for the wealthy expire. However, because of the fragile state of the economy, some prefer to have a temporary two-year extension of the upper-income tax cuts, and then to let them expire. Alan Blinder suggests allowing the upper-income tax cuts expire now and spending the money on programs generally considered to more significantly boost the economy, such as unemployment benefits. Alan Greenspan said that he wants all the tax cuts to expire immediately, regardless of the effect on economic growth in the near term. CRFB president Maya MacGuineas suggests extending them all for two years in exchange for a budget deal to pay for them beyond that. Others hope that all of the tax cuts will be extended permanently. And now House leaders are mulling the possibility of temporarily extending only the middle class tax cuts for two years, then letting them expire.

Yeah, we know. It's complicated.

Believe it or not, though, the conversation is simplified because everyone is using the "Obama framework": dividing the tax cuts into two parts based on the $250,000 line (although it should be noted that some of the "middle class" tax cuts also benefit upper income taxpayers too, specifically the 10/25/28 income tax brackets.) The conversation could shift if we changed where we set that line. As we have pointed out, only letting the "over $250,000" tax cuts expire still leaves a gaping fiscal hole. Obviously, if the limit was lower, it would bring in significantly more revenue (although specific estimates are not available).

Another option for lawmakers is to examine specific policies and see what is worth extending/modifying, instead of drawing a line in the sand at a particular income level. It might be more beneficial for the sake of the tax code to decide which policies we like, rather than going by income level. Specific rate cuts or tax credits would be scrutinized based on their cost, economic effects, and distributional effects, hopefully leading to an improved tax system.

Of course, we'd prefer to see tax cut extensions paid for no matter how they are done. However, we'd also prefer that lawmakers not make tax policy solely on the basis of deficits and debt (though it should be the main concern). The opportunity should not be lost to pursue an improved tax code overall and decide how to remake it for the better of our future economy. The Wyden-Gregg plan and Paul Ryan's plan (as part of the Roadmap for America's Future) are thoughtful ideas that deserve consideration, although both fall short of the revenue needed. Perhaps Congress could extend the tax cuts temporarily to buy the time to come up with a tax reform plan that political leaders from both sides could get their weight behind. Then we could have a broad-based and efficient tax code that is more conducive to a healthy economy.