Extend the Bush Tax Cuts? It’s the Wrong Question

By :: August 3rd, 2010

Washington is about to spend months trying to answer the wrong question. Instead of reprising their partisan, tiresome, and largely unproductive argument about what to do with the Bush tax cuts, President Obama and Congress ought to be asking a very different question: How do we build a tax system capable of generating the revenues we need to fund the government we want in the most efficient and fair way possible?

The debate over the Bush tax cut will get us nowhere. Already, Republicans are accusing Democrats of wanting to raise everyone’s taxes. Democrats accuse Republicans of pandering to their rich pals. They are like eight-year olds: “Did not. Did too. Did not.”

The pols are trapped in an argument about whether the distribution of taxes in 2000 was correct, or whether the distribution in 2010 is right, as if there are no possible alternatives. They haggle over whether it is best to extend the current tax breaks for everyone, or only for those making $250,000 or less as Obama prefers, as if there are no other options. And hardly anyone mentions the nearly $3 trillion increase in the national debt we’ll face over the next decade even if we extend the tax cuts only for those making less than $250,000.

Just think how much more productive it would be if we reframed the entire debate. I was asked about this today on the syndicated NPR show Here and Now, and it is a fair question. Why have we allowed ourselves to remain trapped by a decision made nearly a decade ago? Some pols would have us believe the 2001 tax cuts were the Ten Commandments, fixed and immutable for all time. But why not think outside this particularly small box?  What sort of government do we want? And how should we pay for it? This question inevitably leads to a couple of others that can help us focus even more:

*Should the income tax continue to be the foundation of our revenue system? If so, do we want to raise rates while protecting hundreds of billions of dollars in special interest tax subsidies. Or should we reprise the 1986 Tax Reform Act, where we broadened the tax base by eliminating many special provisions and lowered overall rates. It seems like a good idea to me, but let’s debate it.

*Is the income tax fixable at all, or is it so broken that we’ll need to replace it, or supplement it, with a Value Added Tax or some other consumption tax? Such a change would have profound implications, not only for the budget, but for spending, savings, and investment. And it could create a very new set of winners and losers than under the current tax system.

*What is the role of Social Security and Medicare taxes in a fair and efficient revenue system? With almost no discussion, this year’s health law fundamentally changed the nature of the Medicare tax by imposing it on investment income, rather than just on wages (starting in 2013). Perhaps we want to talk about this one some more.

There is plenty of blame to go around for Washington’s failure to have this discussion. I place much of it in the lap of Obama, however, who has never shown the same enthusiasm for reforming taxes as he has for remaking health care, education, and the financial markets. Perhaps his deficit reduction commission will take fundamental tax reform seriously, though I’m not holding my breath. It is as if the political wizards inside the White House have counseled Obama to avoid the issue at all costs, just as President Bush’s advisers urged him to walk away from tax reform.

Maybe they are right about the politics. Who knows? But I do know this: Until Obama and Congress ask the right question, there isn’t much chance they will come upon the correct answer.