It seems to me that the debate about the pending expiration of the Bush tax cuts boils down to a very difficult choice between two bad outcomes. Despite what some politicians would have us believe, extending the cuts will adversely affect a very bad deficit situation. And, despite the data that shows little correlation between tax policy and economic growth, the current economic environment appears to be one which is at great risk.
Of the four alternatives which seem to have a reasonable chance of approval in Congress, there is one which is least bad. There is another alternative proposal, one with little or no chance of passage, which I’ll get to after the other four.
There is an excellent study out there from Pew Economic Policy Group that analyzes the choices nicely. According to Pew: "Making the tax cuts permanent for all taxpayers, regardless of income, would cost $3.1 trillion over the next 10 years and inflate the national debt to 82 percent of GDP." That is an unacceptable outcome.
The Obama plan is better, but not by much: Limiting the extension to individuals making less than $200,000 and married couples earning less than $250,000 would cost about $2.3 trillion in the next decade. Absent any offsets, this proposal would inflate the national debt to 78 percent of GDP by 2020. We would still have a staggering debt load crippling the government and the economy.
Following the original plan laid out by President Bush and the Republican Congress yields the best result: If the tax cuts are allowed to expire at the end of 2010, the debt-to-GDP ratio would rise, reaching 68 percent by 2020. OK, 68 percent of GDP is still bad, but a lot better than 78 percent or 82 percent.
But, as they say in the infomercials, wait! There’s more! Extending the tax cuts for all taxpayers for only two years, as some have proposed in light of the fragile economy, would cost $558 billion over the next 10 years and increase the debt to 70 percent of GDP by the end of the decade.
I find this last idea the most compelling. It buys the economy two more years to get back on its feet, avoiding the risk of killing the recovery. At the same time, it is only marginally more damaging to the deficit picture than total expiration and far superior to a permanent extension or the Obama plan.
At the outset, I mentioned another alternative with little chance of Congressional approval. It is a budget plan put forward by the Republican Study Committee. I recommend you read it. There is a lot in the RSC plan which will be unacceptable to many Republicans as well as Democrats. It slaughters a lot of sacred cows. But, it is thought-provoking and contains a lot of ideas which make a lot of sense to me. I think it deserves to be part of the debate.
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