Bush tax cuts 101: Do tax cuts for the rich help the economy?

Some Democrats are in revolt now that President Obama has backed a deal to extend all the Bush tax cuts – even to the rich. Economists differ on the value of tax cuts for the rich.

Are Bush-era tax rates for the rich a kind of rocket-fuel for the economy? Or would this be an unfair giveaway to the rich at a time of historically large federal deficits?

That's the politically volatile debate surrounding the tax-cut deal worked out by President Obama and congressional leaders this week. The president agreed only to a temporary, two-year extension of tax cuts for households earning more than $250,000. But in a press conference Tuesday several reporters asked if he had caved in to Republican pressure.

Mr. Obama says he is choosing to work out a compromise that helps middle-class and poor Americans, while not making the tax breaks for top income brackets permanent. The debate over tax rates for the rich will remain as election-campaign fodder heading toward 2012.

Here's a summary of the pros and cons of extending Bush tax cuts for the rich:

Yes, extend tax cuts for the rich

The US tax code is progressive, and arguably the Bush tax cuts increased the relative burden on the rich. In 2004, the top 20 percent of households paid a larger share of all US income taxes than they did in 2000, before President Bush took office, according to the conservative Heritage Foundation.

Where fans of low-income tax cuts emphasize the benefits of added consumer spending, proponents of tax cuts for the rich say the move boosts savings and investment – and thus helps the economy.

Also, although the rich spend a bit less of each tax dollar saved, their role in consumer spending is very important. Finally, conservatives emphasize that raising tax rates can backfire, pushing capital out of the country or causing the wealthy to seek tax-shelters.

No, let tax rates for the rich rise

Where conservatives argue that the Bush tax cuts helped make a weak economy stronger after 2001, liberal economists say they see scant evidence of this. And now, with gargantuan budget deficits, they say the responsible thing is to ask America's "haves" to pay at the tax rates they did in the late 1990s.

Just because the US tax code is progressive doesn't mean it's as progressive as it should be, these critics add. America's wide gap between the rich and the middle class or poor has widened considerably in recent years. Extending the Bush tax cuts would be worth about $340,000 in 2011 to the average household that ranks in the the top 0.1 percent by income, according to an analysis by the nonpartisan Tax Policy Center.

The trend of widening inequality appears to be driven less by tax rates than by economic forces, such as wages that rise fastest for the skilled and educated. But some economists worry that American society and democracy will become less stable if this trend continues.

Whichever side is right, ending tax cuts for the rich will not close the federal budget gap by itself. Yes, it's big money. The tax breaks are estimated at $700 billion over the next decade. But Obama's bipartisan fiscal commission last week outlined a goal of nearly $4 trillion in deficit reduction over 10 years to restore the government's fiscal health.