Dueling Opinions on the End of the Bush Tax Cuts

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The president supports permanently extending the current tax rates for all except the highest-income households, while Congressional Republicans want the entire basket of cuts to be made permanent. The prudent middle ground would be to forestall any tax increases in 2011 and to phase in higher rates on upper-income households in 2012, when the economy will be on firmer ground.

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The president’s plan would be taking an unnecessary gamble with the struggling recovery. Businesses have only recently begun to add jobs, and they appear to be a long way from hiring fast enough to reduce unemployment. Even under the best of circumstances, the unemployment rate will remain near 10 percent well into next year. The high rate of joblessness has cast a shadow on the collective psyche that will only worsen with higher taxes, raising the already uncomfortably high odds that the economy will suffer a double-dip recession.

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In most times, raising taxes on the wealthy by such a modest amount has had little impact on the economy. But these aren’t most times.

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“There are many good reasons not to extend the high-end parts of the Bush tax cuts having to do with the fear that a temporary extension could be made permanent,” Bernstein said. “What you are talking about — a $30 to 40 billion range in terms of adding to the deficit by extending the high end — could easily become $700 billion over a ten-year budget window.”

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“I think the phase out suffers from that vulnerability,” he went on. “You are exposing yourself to the risk that it could be made permanent. The president, [Treasury Secretary] Tim Geithner have been very articulate on this point. If you wanted to, and we do, provide more help to the economy that is about the worst way you could do it. Those folks tend not to be liquidity constrained and therefore the kinds of multipliers associated with that type of spending are the lowest. So it simply is not good stimulus policy and it is not good budget policy.”