Commentary | Budget, Taxes, and Public Investment

Let the tax cuts for the rich expire

This op-ed was published Aug. 17 in The Milwaukee Journal Sentinel.

Congress is gearing up for a battle that will have profound economic and budgetary ramifications: Should the Bush tax changes expire as scheduled under current law, or should there be a partial or full extension?

While some of the changes for the middle class have boosted take-home pay for many families, the tax cuts for the wealthiest are both poorly designed short-term stimulus and ineffective long-term economic policy.

The tax changes enacted in 2001 and 2003 by President George W. Bush and a Republican-led Congress were loaded with gimmicks, the benefits were skewed heavily toward the wealthy, and they added trillions of dollars to the national debt.

Some have argued that because the economy remains weak, the tax changes should be extended in their entirety, either permanently or temporarily. While it’s true that tax cuts can provide an economic boost, it is also true that not all tax cuts are equal.

Increasing the take-home pay of low- and moderate-income families will lead to more spending and a boost in demand for goods and services and, thus, more jobs. By contrast, tax cuts for the wealthy are more likely to be saved, providing a relatively ineffective response.

Economist Mark Zandi of Moody’s Analytics estimates that every dollar spent making the Bush income tax cuts permanent generates only 32 cents of economic activity. Comparatively, every dollar spent on unemployment assistance generates $1.61 worth of economic activity, a dollar of spending on infrastructure yields $1.57 and a dollar in assistance to states to prevent layoffs of teachers or first responders yields $1.41. Tax cuts for the wealthy are simply not a good way to stimulate the economy.

A much more economically sound approach to supporting the economy would be to let the tax cuts expire for those at the top of the income scale and to use the revenue to fund more cost-effective job creation policies.

President Barack Obama has proposed repealing the reductions for those making over $250,000, and even a small portion of the revenue generated – some $629 billion over the next 10 years – could be used to fund supports for those hardest hit by the recession, to aid state and local governments, to fund transportation projects and even to help localities directly employ some of the 14.6 million people who are ready to work, while also reducing the deficit in the long-run.

Simply put, the cost of extending the upper-income Bush tax cuts, in both dollars and lost opportunities, is unacceptably high.

Many have argued that the tax cuts are good for the economy over the long term. Lower tax rates for the wealthy might increase incentives to work or invest more – and these benefits might eventually trickle down to average families. The economic record tells a different story. Of the 10 economic expansions since 1949, the expansion from 2001 through the end of 2007 ranks dead last in terms of economic growth, national investment, employment and employee pay.

The Bush-era tax policies did not lead to economic progress. In fact, the opposite was true. Why should we expect a different outcome looking forward?

Finally, some have argued for only a temporary extension. As a matter of good governance and good tax policy, major structural changes to the tax code should not be enacted on a temporary basis.

A one- or two-year extension of the cuts for the wealthy is a poorly designed stimulus and would set a fiscally irresponsible precedent for our nation’s long-run budgetary planning. Congress should extend permanently reductions for the middle class and let the other provisions expire.

We need to streamline and modernize the tax code, not perpetuate a failed system.

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