The Battle Over the Bush Tax Cuts

August 4, 2010

Congressional Democrats and Republicans will likely lock horns in the coming weeks over the fate of the 2001 Bush tax cuts. Divided largely along party lines, lawmakers are at odds about whether to extend or repeal more than $3 trillion in tax cuts, which are set to expire at the end of the year. Senior Fellow William Gale weighs in saying it’s a complicated and thorny issue.

Better Ways to Stimulate the Economy

“The issue currently gets framed as ‘What do we do about the Bush tax cut?’ The bigger issue is really ‘How do we best stimulate the economy right now?’ The Bush tax cut, generally, is not the best way to stimulate the economy. Certainly, the tax cuts for lower and middle-income households would be more effective in stimulating the economy (because people are more likely to spend those) than the tax cuts for high-income households would be (because high-income households are likely to save the funds). Government spending – on infrastructure, on unemployment compensation, on aid to the states, on food stamps, etc. – is likely to have a much bigger bang-for-the-buck than either the tax cuts for low and middle-income households or the tax cuts for high-income households.

It is also important to remember the Bush tax cuts were designed in 1999 when (then Governor) Bush was campaigning for the White House. They were not designed as a stimulus package. The way to see that is that in 2001 when they actually passed and people were worried about a recession, Congress added the rebates to the tax proposal. The rebates were never part of the original proposal and they are not being talked about being extended now. So the tax cuts that are being talked about being extended now were never intended as a stimulus.”

False Debate

“There is this trade-off that people talk about between increasing the budget deficit and stimulating the economy now, and reducing the budget deficit later and bringing the budget back into balance. That is really a false debate. We need to be doing both of those. We need to be stimulating now (that is increasing the budget deficit), and we need to be putting ourselves on a path so that as the economy recovers, we encourage budget discipline. The economy is more important than the budget, and we need to deal with the economy now. This is not the time to be balancing the budget. So we need to take care of business with the economy first, get the economy going, and then get ourselves on a path later (in the next three to five years, say) towards budget balance.

I don’t see a conflict between stimulating now and discipline later. In fact, I think each of them would be more effective if we were doing the other one as well. So stimulus now would be more effective if there was a budget discipline option, because it would show investors that interest rates are not going to go through the roof in the future. Likewise, the budget discipline option would be more effective if there is stimulus now, because the stimulus will help bring the economy back. That is the first thing we need to do in order to help the budget.”

Efforts to Extend Cuts Have Failed

“We have known since 2001 that these tax cuts are going to expire at the end of 2010, and only now are we talking about them seriously. Interestingly, from 2001 to 2006, we had a Republican Congress and a Republican in the White House, and the tax cuts were never extended. So we are in a funny situation now where the Democrats in Congress and the White House are considering extending these tax cuts, which even a Republican Congress wouldn’t extend (even though President Bush asked for the extension every year he was in office).”