The wrong tax debate, the wrong tax policy

Obama needs to return to his original tax priorities, and stop treading in the morass of the Bush tax cuts.

Today I have an opinion piece on CNN.com which doesn’t say anything you haven’t heard me say here before (over and over again!), but it was awfully nice of CNN to invite me to publish it where it will certainly get more eyeballs. Here’s the opening:

(CNN) — President Obama proposes to let the Bush tax cuts for the rich expire as a way of “saving” $700 billion over the next 10 years. He says that our nation cannot afford those cuts, given the unsustainable outlook for the federal budget and the threat it poses to both our short-term and long-term economic health.

But that savings is just a fraction of the $2.2 trillion cost (without interest) of the generously defined “middle-class” portions of the Bush tax cuts, which President Obama does want to extend.

The president’s choice to continue most of the Bush tax cuts is puzzling. He has repeatedly blamed the Bush tax cuts for the fiscal mess he inherited and rightly points out that they did our economy little good — and a lot of bad — over the past decade.

To the list of examples of deficit-financed fiscal policies that would be more effective at stimulating the short-term economy, I should have added some tax cuts that President Obama can more legitimately call his own, which E.J. Dionne handily reminded me about in his column in yesterday’s Washington Post:

[N]otice that this entire battle is being framed around Bush’s proposals. The parts of the Obama stimulus program that never get discussed — one reason it may be so unpopular — are its many tax reductions.

John Podesta, president of the Center for American Progress and White House chief of staff under President Bill Clinton, noted the Obama tax cuts also expire at the end of this year: “I don’t understand why we’re only talking about extending George W. Bush’s tax cuts, which are heavily skewed to help the wealthiest Americans, yet no one’s discussing President Obama’s cuts, which are exclusively focused on middle-class families.”

I don’t understand it, either. The stimulus included not only the broad Making Work Pay tax cut that gave most families an $800 refundable tax credit but also the child tax credit and the earned-income tax credit, which were especially helpful to lower-income families…

But remember, President Obama’s mistake all along has been putting the failed Bush tax cuts ahead of his own tax policy agenda. The first time he included an extension of the Making Work Pay tax credit in his first budget (for fiscal year 2010), he proposed a permanent extension with its costs to be offset with revenues from auctioned carbon permits (climate change policy). Well, that didn’t go over so well with Congress (including Democrats in Congress), once they realized that such a climate change policy was actually intended to raise revenue. As soon as it became clear Congress wouldn’t support that offset, the President backed away from his proposal, claiming that because it was in place until the end of 2010, he would have some time to revisit the proposal later. Meanwhile, he has continued to propose deficit-financing the permanent extension of $2 trillion worth of the Bush tax cuts which have always been scheduled to (also) expire at the end of 2010. I’ve never understood why President Obama repeatedly jettisons his own policies in favor of his predecessor’s (by his own label) “failed” policies.

Incidentally, in the President’s latest budget submission for fiscal year 2011, he proposed just a one-year extension of the Making Work Pay tax credit, this time deficit-financed under the umbrella of policies intended specifically as “stimulus” (which to work properly should be deficit financed). But the proposed extension of the “middle-class” Bush tax cuts is still included as part of the Obama “current policy” baseline and is still permanent and still fully deficit financed. No justification needed.

I’m not claiming that a permanent, deficit-financed extension of President Obama’s Making Work Pay tax credit would be a good tax policy for the long run. But that’s not what President Obama ever proposed. He did it right: he first proposed permanent extension fully offset as a longer-term tax policy, and then (when that didn’t work) proposed a temporary, deficit-financed extension as stimulus. And in terms of stimulus, a temporary extension of a refundable tax credit like the Making Work Pay credit would be more effective in terms of economic “bang per buck” than any extension (temporary or permanent) of the “middle-class” Bush tax cuts–and far less harmful to the longer-term fiscal outlook.

I’m asking (yet again) why does President Obama refuse to hold the Bush tax cuts up to the same standards as his own policies? I (like E.J. Dionne and John Podesta) just don’t get it. He’s never really liked the (”failed”) Bush tax cuts that much, right?

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**Addendum (2 pm): Here’s CQ’s Richard Rubin’s take on it (subscription required).

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