Thinking About Tax Cuts

by Stuart Shapiro

First let me be absolutely clear.  The Democrats screwed up royally by not dealing with the tax cut issue long before the November election.  Their leverage has disappeared and any solution will be inferior to the worst deal they could have reached in October.

But now there is the question of what to do now.  David Leonhardt outlines two options:

The first is a millionaire’s tax, in which the Bush tax cuts would be extended only on income below $1 million. . .

The second, more likely option is to extend all the tax cuts — and to package them with other tax cuts and spending likely to do more to help the economy than the Bush tax cuts.

And Atrios comes up with a third:

Dems should just call their bluff and let all the damn tax cuts expire. Then instead of having this political malpractice having a conversation about “extending the Bush tax cuts” Obama can create his own shiny new tax cut plan.

The House effort today to vote on extending the Bush cuts for those with incomes under $250K is good politics but won’t lead to anything since the Senate won’t be able to vote on it.  So which of these options should the Democrats pursue?

Letting them expire would give a temporary political boost since it could be portrayed as Republicans blocking tax cuts.  However, that would quickly fade, as House Republicans would pass an extension of all the cuts in January and the Senate would soon follow suit.  President Obama would then either have to veto tax cuts for all Americans or sign a bill that extends the deficit by hundreds of billions of dollars.

Passing the cuts but attaching them to some stimulus measures would also add to the deficit (perhaps a three-year extension would mitigate that but there is no reason to think they would be allowed to expire in three years) but would help the economy, which of course helps President Obama in 2012.

The millionaire’s tax is attractive politically and might get the two Republican votes in the Senate necessary to pass.  It cuts the impact on the deficit and sets up higher tax rates for the very wealthy (as Leonhardt mentions, the fact that we tax the 4o millionth dollar at the same rate as the 400,000th dollar is ludicrous).  However if you don’t get it passed you are back at the expiration option.  I guess I’d go with this as the least of three evils and promise Scott Brown and George Voinovich whatever it took to get their votes.

By: Stuart Shapiro

Stuart is a professor and the Director of the Public Policy
program at the Bloustein School of Planning and Public Policy at Rutgers
University. He teaches economics and cost-benefit analysis and studies
regulation in the United States at both the federal and state levels.
Prior to coming to Rutgers, Stuart worked for five years at the Office
of Management and Budget in Washington under Presidents Clinton and
George W. Bush.