Brace Yourselves For A Tax Cut Extension

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Ezra Klein's post on CBO chief Doug Elmendorf's testimony today before the Senate Finance Committee frames it in a positive light, based upon this chart which clearly indicates that extended tax cuts will actually reduce income in 2020 if the Bush tax cuts are extended.

While all of that is true, the idea of permanently extending the upper-end tax cuts is really not on the table. What is on the table, and what has been on the table since Peter Orszag wrote his New York Times column is to extend the Bush rates on the upper tier for 2 more years. Elmendorf's chart gives exactly the political cover necessary for Congress to do that.

Elmendorf doesn't deny that tax cuts stimulate the economy. But they don't stimulate it that much, he says, and over the long run, the net economic growth from the tax cuts will be quite small. The net deficit impact won't be. "Lower tax revenues increase budget deficits and thereby government borrowing," Elmendorf said, "which crowds out investment, while lower tax rates increase people’s saving and work effort; the net effect on economic activity depends on the balance of those forces."

The first two bars compare permanent versus partial extension of the cuts. The second two compare a full extension and partial extension through 2012. They point to a negligible effect on the economy if a 2-year extension is granted, whether full or partial.

This is a terrible idea. Terrible. I don't really care what the economic argument is for it at all. From a political standpoint, there could be nothing worse than extending those upper-tier cuts until 2012. Here's why:

  1. It pushes the entire debate into the next Presidential election, giving Republicans the ability to promise making them permanent, just like they are now.
  2. It ignores the very real deficit issues. We already know the upper tier does not spend or invest tax savings, but simply sits on those funds, which is neither stimulative nor helpful.
  3. It's time to face the fact that fighting two wars cost this nation something, and start paying it down. What Bush did with the tax cuts is exactly what some folks did with these subprime loans. They borrowed money they shouldn't have for stuff they shouldn't have spent money on, and in the end, it hurt the entire global economy.

In early 2008 I wrote a post saying what no one wanted to: tax increases were inevitable, no matter which party was in power. Nothing has changed since then. There should not even be a debate about this. It is as simple as this: As a nation, we owe a whole lot of money for trashing Iraq and Afghanistan. It's time to start making payments.

Deferring the debate to 2012 is cowardly and stupid. There's not enough political payoff in it for anyone to make it worthwhile. Yet, I guarantee you this chart will give Democrats exactly what they need to push for a 2-year extension. Someone needs to tell them gently or harshly that the answer is no. Let them all expire if necessary, but an extension is political suicide.

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