BUSH TAX CUTS FOR THE RICH MUST GO / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( RECOMMENDED READING )

Bush tax cuts for the rich must go

By John Podesta and Robert Greenstein

Published: August 24 2010 20:39

Congress can kill two birds with one stone when President George W. Bush’s tax cuts expire in December. It can – and should – extend cuts for strapped middle-class families while America digs its way out of recession. It should also let the tax cuts for the wealthiest 2 per cent of households expire, as a wide range of economists recommend, to make a sizeable dent in the nation’s unsustainable longer-term budget deficits.

Our leaders face the enormous challenge of navigating economic policy through a narrow channel. The president and Congress must provide near-term support for an economy still struggling to recover from a devastating recession, while simultaneously addressing longer-term structural budget deficits. Extending the middle-class tax cuts but permitting tax cuts for the wealthy to expire on schedule supports both goals.

Yet some conservatives, many of whom cite red ink to oppose emergency measures such as a temporary extension of unemployment insurance that would hardly affect longer-term deficits, are threatening to block the extensions of middle-class tax cuts unless Congress also includes about $750bn in tax relief over the next decade for the top 2 per cent of earners, whose average annual income is $800,000. Unfortunately, a few centrist Democrats are joining the conservative stampede to extend the Bush tax cuts for this sliver of households.

Those who think this would be good for the country should think twice. It threatens the nation’s fiscal health. Extending high-income tax cuts would signal to financial markets that our political system is incapable of comprehending, let alone beginning to address, our long-term debt problem. Allowing these tax cuts to expire, on the other hand, would shrink deficits and debt by about $830bn over the coming decade. Moderates considering a temporary extension of the high-end tax cuts should remember that if such an extension is enacted, the next Congress – which will include more proponents of making all the Bush tax cuts permanent – will likely extend the tax cuts again, setting the stage for them ultimately to be made permanent.

In spite of the blow to fiscal discipline, some argue that extending tax cuts for the top 2 per cent is critical for creating jobs and sustaining recovery. Yet the Congressional Budget Office ranked extending these cuts dead last out of a range of options for boosting the economy. CBO analysis indicates that just $13bn in state fiscal relief is more effective than the $40bn price tag of extending the high-income tax cuts for a year.

Proponents of high-income cuts also claim that their expiry would hurt small businesses and cause them to stop hiring. That’s a red herring. Only 3 per cent of businesses would be affected, and many of these are corporate law firms, financial partnerships, and the like – not what most people think of as small businesses. Furthermore, small businesses’ hiring decisions are overwhelmingly driven by two factors: demand for their products and access to credit, not whether the top marginal rate is 35 per cent or 39.6 per cent. Over the long term, soaring deficits and debt will pose the biggest danger to small businesses by driving up interest rates and raising the cost of new investment.

Had the tax cuts actually resulted in the creation of millions of jobs and impressive economic growth, proponents of extending cuts for the top brackets might have some justification. But although tax cuts for the top were a central element of Mr Bush’s “trickle down” programme his approach generated unimpressive job growth, increased inequality, no gain in income for typical working-age families, and soaring deficits. Only 4.7m private-sector jobs were created from June 2001, when the principal Bush tax cuts were enacted, to the onset of the recession, and most of those were wiped out in the last year of the Bush presidency. Median income for working-age families was actually $2,100 lower in inflation-adjusted terms in 2007 than it had been in 2000. The federal balance sheet had turned, even before the economic downturn hit, from a healthy surplus to an ocean of red ink.

Compare that to the 1990s, after taxes on high-earners were raised in both 1990 and 1993. The Clinton administration oversaw the creation of 21m private sector jobs, an $8,000 increase in median income for working-age families, a 34 per cent expansion of GDP and a federal budget that went from record deficits to the first surplus in 30 years and the promise of surpluses for years.

Ironically, many of the same voices calling to extend the high-end Bush tax cuts warned that Clinton’s tax increases on well-to-do Americans would cripple the economy and continue to insist that tax cuts magically pay for themselves. Given that the facts show otherwise, their credibility on fiscal matters should be considered on par with BP’s safety record.

By letting the tax cuts for the top 2 per cent of households expire on schedule, policymakers can continue to help middle-class families while harvesting low-hanging fruit on deficit reduction. We cannot afford to let blind ideology and rabid partisanship threaten sensible economic policy.

John Podesta is the president and chief executive of the Center for American Progress and former chief of staff to President Bill Clinton. Robert Greenstein is the founder and executive director of the Center on Budget and Policy Priorities.

Copyright The Financial Times Limited 2010.