Why we can't afford to extend the Bush tax cuts

Extensions would bring US national debt to unsustainable levels.

The Tax Policy Center’s Howard Gleckman astutely observes that the “jobs-creating, loophole-closing tax [extenders] bill does little of either.” He notes the irony in claims that these temporary-but-perennial tax cuts (more formally referred to as the extension of “expiring tax provisions”) are fiscally responsible and good (even “essential”) for the economy:

The Joint Committee on Taxation estimates that extending the expiring provisions would reduce federal revenues by $32.5 billion over 10 years. But keep in mind these tax subsidies would all expire—on paper at least—over just a year or two. A more accurate 10-year estimate of the revenue loss (assuming the tax breaks eventually are continued throughout the decade) would likely approach $200 billion…

[W]hile nearly all of the cost of extending the 70 expiring provisions occurs in 2010 and 2011, 90 percent of the revenue to pay for these goodies would not be collected until 2012 and beyond. It isn’t hard to imagine that much of this money will never materialize, either because the law will be changed or because very smart lawyers will figure ways around it. The overall bill, including the new spending, would add about $140 billion to the deficit. It is hard to be too cynical about tax extenders that have reached a state of near-immortality. But the least Congress could do is to call this annual rite what it is: Continuing tax loopholes, not closing them.

And speaking of the deficit-financed extension of expiring tax cuts being twisted around and artistically re-characterized as “fiscally responsible,” let’s bring up my favorite issue–or more accurately, “peeve.” I consider the “mother of all tax extenders” the proposed extension of most of the Bush (2001 and 2003) tax cuts, which is the single most costly deficit-financed policy proposed in President Obama’s budget. This week the Pew Charitable Trusts issued a report (”Decision Time: The Fiscal Effects of Extending the 2001 and 2003 Tax Cuts”) that puts the cost of extending the Bush tax cuts in better perspective. The report notes how the deficit-financed permanent extension of these tax cuts (even “just” most of them as proposed by President Obama) would add significantly to the federal debt, bringing it to more clearly “unsustainable” levels of around 80 percent of GDP in just ten years–and highlights the fact that allowing (just) the top-end rate brackets to expire (continuing tax cuts in full for those with incomes under $250,000) barely saves money relative to the cost of extending the entirety of the Bush tax cuts. Another way the Pew report highlights how costly the Bush tax cuts are is to point out how hard it would be to pay for the extension of the tax cuts by reducing government spending; for example, one way to pay for extending “only” the Bush tax cuts that President Obama proposes to extend would be to cut all mandatory and discretionary federal spending by 5 percent. (If you want to extend all the Bush tax cuts, you’d have to cut all federal spending by 7 percent.)

The Pew report also suggests that you could make the extension of the Bush tax cuts not so much a “mother of a” tax extender by extending them for only two years, rather than permanently. But then of course you get back to Howard’s fundamental question: is there really such a thing as a fiscally-responsible (inexpensive and truly “expiring”) tax extender?

The Pew report doesn’t really provide any estimates that the CBO budget outlook hadn’t already provided; it just more clearly highlights the significance of the policy choice the Obama Administration will make about the Bush tax cuts. Concord’s “plausible baseline” uses the CBO numbers on expiring tax provisions another way, to show that under a fiscally “worst-case” scenario where all expiring tax provisions currently on the books (including stimulus tax cuts) are permanently extended and entirely deficit financed, these tax cuts would add $6.3 trillion to the ten-year (2010-20) budget deficit, which under current law (assuming all expiring tax provisions actually expire as scheduled) is “just” $6.0 trillion.

So this is a huge deal–this proposed permanent extension of most of the Bush tax cuts. As this hilarious Onion story suggests, it is like a “sprouting leaf of spinach.” How so?

After nervously clearing his throat, Motley was heard to ask, “Wherefore is the National Debt like a sprouting leaf of spinach?” When a glowering Obama demanded the answer, Motley stated, “For it shall rapidly grow into something our children cannot bear.”

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