Committee for a Responsible Federal Budget

Turning the Tax Cuts into a Hammer

Apr 12, 2010 | Taxes

What to do about those pesky expiring tax cuts? Generally speaking, Republicans want to extend them all; Dems want to extend most of them; and no one wants to pay for any of them. When politically motivated giveaways meet fiscal realities, politics tends to win. And deficits explode.

 
But it is nothing short of fiscal foolhardiness to march forward with a plan to extend the 2001/2003 tax cuts, whether for everyone (which would cost $3.2 trillion over 10 years) or for those making under $250k (which would cost $2.4 over 10 years) without either 1) offsetting the costs, or 2) putting in place a separate budget plan to stabilize the debt at a reasonable level. (We recommend 60% of GDP and then lower over time.)
 
Yet Congress appears poised to make the dangerous choice of making the tax cuts permanent before taking any of the necessary measures to fix the budget.
 
Given the widespread support for extending the tax cuts and the tendency to want to include “sweeteners” as parts of budget deal, we should instead restructure the tax extension debate to be part of the solution rather than just digging the deficit hole deeper.
 
One way to do this is to extend the Bush tax cuts for a short amount of time – say two years – with the explicit agreement that they will only be extended further and made permanent once a reasonable budget deal has been put in place. (Yes, temporary polices are generally bad policy which lead to excessive uncertainty, but in this case, they are better than the alternative of extending them permanently without making any progress on the budget.) Both political parties are arguing for fiscal responsibility - so here is a chance to prove it.
 
This would turn the expiration of the tax cuts at the end of 2012 into a realistic action-forcing hammer and they could then be made permanent only as part of an over all budget deal, creating – viola – the sweetener.  Otherwise, the task of stabilizing the debt goes from really hard to nearly impossible - not the kind of policy challenge we need to set for ourselves.

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