Tuesday, March 09, 2010

Fiscally reckless extension of expiring tax cuts

The Obama Administration's budget proposal for fiscal year 2011 includes proposals to extend permanently a number of tax cuts that were adopted in 2001 and 2003 - extending just about everything major from those Bush Administration enactments, if I recall correctly, other than their elimination of the 36% and 39.6% income tax brackets and repeal of the estate tax. (Dividend and capital gains rates, however, would go to 20% rather than staying at 15%.)

As the Congressional Budget Office declined to follow the Administration in treating permanent extension as the new baseline, the Joint Committee on Taxation treats the proposed extensions as revenue-losers for estimating purposes. (Of course, the choice of baseline has no effect on the dollar comparison between extension and non-extension - it just determines whether you put a plus sign or a minus sign on the difference.)

Anyway, the JCT has now released its revenue estimates, which score the extension as costing $2.465 trillion in revenue during the ten-year period from 2010 t0 2020.

This is obviously fiscally reckless and unsustainable given the long-term U.S. budgetary picture. In general, it doesn't lower taxes relative to expiration - it simply shifts higher taxes from the present to the future.

I understand the political dynamic here, and I realize one could reasonably argue that it's hard to blame the Obama Administration too much. Because in fact the voters' baseline for the dreaded concept of a "tax increase" is current policy rather than current law - as Rebecca Kysar correctly argues in the paper we discussed at the NYU Tax Policy Colloquium last week - the Administration had no choice unless it wanted to face huge attacks at a very tough time for supposedly imposing the "biggest tax increase in U.S. history" - a charge we no doubt would have heard had they merely proposed to keep present law with the tax cut sunsets. Plus, for business cycle reasons I suppose one might have wanted to postpone at least some of the sunsets for a year or two in any event. And in addition some of the sunsets are good policy structurally or otherwise (e.g., addressing double taxation via a dividend tax that is below the ordinary income rate, and providing a refundable child tax credit along with marriage penalty relief).

Still, dropping $2.465 trillion over ten years when one already faces an unsustainable long-term budget picture that the political system appears utterly unable to address is, at a minimum, highly disappointing.

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