Extending the Bush Tax Cuts

What should Congress do about the Bush tax cuts that are set to expire at the end of the year? That question is going to absorb much of Washington’s attention through the fall and—if present hyper-partisan trends continue—perhaps even beyond. On Wednesday, the Senate Finance Committee kicked off the coming drama by bringing in a group of tax experts to set the stage.

The Tax Policy Center was represented by our current director, Donald Marron, and by one of our founders, Len Burman. Donald estimated the revenue effects of extending some or all of the 2001 and 2003 tax cuts, and described who would benefit from continuing these tax breaks. Len argued that while a permanent extension of all the tax cuts would be a fiscal catastrophe, Congress should temporarily continue those provisions aimed at low- and middle-income households who would most likely spend the money and boost the still-struggling economy.

As Donald noted, extending all the Bush tax cuts as well as continuing to exempt millions of middle-income taxpayers from the Alternative Minimum Tax would be very good news for high-income taxpayers and very bad news for the federal budget. Extending the individual income tax cuts and the AMT patch would reduce federal revenues by nearly $3 trillion over 10 years, relative to current law (which, of course, assumes all these tax breaks expire). The biggest beneficiaries of the individual income tax cuts, according to TPC estimates: the highest earning 20 percent of households, whose after-tax incomes would average 4.3 percent more than under current law. Those in the highest earning 0.1 percent (households making at least $2.7 million), would enjoy after-tax incomes that would average almost 7 percent, or about $370,000, more than if the Bush tax cuts expired.

Middle-income households would also reap some benefits of extending the tax cuts, but far less than the wealthy. Their after-tax incomes would average about 2.3 percent, or roughly $1,000, more than if the tax cuts disappeared.

Would extending the tax cuts stimulate the economy? Donald’s view is this step would boost short-run demand. But, he warned, that prediction comes with several caveats. When it comes to stimulus, all tax cuts are not created equal. Those targeted to low- and moderate-income households would produce more stimulus than those aimed at the rich, who would be less likely to spend the money. And, he added, much of the stimulus would not kick in until 2012, when families would get their 2011 tax refunds.

In the long run, the benefits of extending the tax cuts are less clear, especially if they are not offset with other tax hikes or spending cuts. This is important since, at the moment, neither President Obama nor very many members of Congress are interested in paying that bill.

Both Len and Donald agreed that rather than remaining focused on tax cuts, Congress ought to reframe the tax issue and begin to think about reform. There, I think both have it exactly right. Refighting the tax wars of a decade ago will inevitably make deficits worse and do little to boost growth. The best course may be for Congress to extend low- and middle-class provisions of the Bush tax cuts for a year or two, and use that time to design a serious tax reform.