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Thursday, July 15, 2010

Should The Bush Tax Cuts Be Extended?

Should The Bush Tax Cuts Be Extended?

Here's my answer from a post at MoneyWatch:

A reporter asked my view on extending the Bush tax cuts:

I have argued very strongly that we need to give the economy more help, so it would be inconsistent of me to say it's OK for taxes to go up.

What I would do, and this is along the lines of what has been proposed, is to keep the tax cuts for anyone below some income threshold. My threshold would be lower than the proposed $250,000, but I can live with that. So taxes would go up for higher income households. But, even though I don't think raising taxes on higher income individuals would have all that much effect on economic activity, why take chances? So I'd take the revenue generated from the increase in taxes on upper income households and transfer them to lower income households. That way there won't be any decline in aggregate demand due to the increase in taxes, and since the transfer is from high savers to low savers, it could even provide a bit of additional stimulus. But the important thing is that aggregate demand won't go down since on net taxes have not been raised (which gives a counterargument to the "you've raised taxes" political charge that would surely be made).

Finally, the taxes that are transferred would be designated as temporary with a fixed expiration date, or linked to economic conditions. But they would be temporary so that in the long-run, the reversal of the Bush tax cuts on higher income households would help to pay off the debt. We'll need to do much more, of course, on health care in particular, but every little bit helps, and in my view equity demands a more progressive tax structure.

So let me try to say this more compactly:

I don't think raising taxes while the economy is still recovering is a good idea. But that doesn't mean we can't use the expiration of the taxes as an opportunity to shift the burden more toward higher income households. So I would allow the tax cuts to expire on high income households, and transfer the savings temporarily too low and middle income households struggling with the weak economy and job market.

    Posted by on Thursday, July 15, 2010 at 09:36 AM in Economics, Fiscal Policy, Taxes | Permalink  Comments (83)


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