Out of Control Policy Blog

In Support of the Tax Compromise

With the passage of the Obama-Republican tax compromise deal in the Senate this afternoon, I offer a tepid and uneasy support of the legislation.

Let's be clear at the start: I am uncomfortable with it. It's expensive. It's rushed. It doesn't push spending cuts. But I believe the tax deal passed by the Senate this afternoon should move forward in the House.

The main reason why is that I don’t necessarily see an extension of the Bush tax laws as a tax cut. American individuals and businesses have been living with the current rates for nearly a decade. And its not that there will be a cut into the current state of revenues. Extending the current rates for two years is no more a "cut" in revenues than the imaginary failure of Congress to push income tax rates to 75 percent across the board in 2008 was a cut.

Ending the Bush-era laws would be a tax hike, pure and simple. That is not to say it would necessarily be bad, but it would be a hike. And that creates just as much unease as the compromise. While it may not be possible to balance the budget without some tax hikes, we should not raise taxes without there being some well thought out reasons and debate. Allowing the calendar to dictate a tax hike that isn’t part of an intentional plan to address America’s budget problems is very poor tax policy. 

Now, I am sympathetic to those conservatives who are balking at this tax deal because it extends unemployment benefits. We're basically kicking the unemployed while they are down (even though we think we're giving them a helping hand). I am sympathetic to those who see this compromise as adding to the deficit by not matching the tax cuts with spending cuts (since OMB and CBO estimates of future deficits have been accounting for an end to the Bush-rates). And I am sympathetic to the Romney view that a two-year extension will mean business investment still will get held back. But while a short-term extension isn't perfect and does yield only limited benefits, a tax hike would be substantively worse. 

And at the end of the day, allowing a sweeping tax hike on all Americans—even on “the wealthy”—is a bad idea. At the very least, the numbers show that just raising rates on those making over $200,000 a year could cut as much as $900 billion in savings and consumption out of the economy over the next 10 years. That shouldn’t be allowed to happen.

My hope is that the current tax laws will be kept in place until we can have a healthy discussion on what to do about the national debt and deficit in a comprehensive way. Just because there is a two year extension doesn’t mean a tax code debate should wait two years. The Reid-Pelosi Congress failed to deal with this comprehensive matter the past four years. Hopefully, the Reid-Boehner Congress won’t see this deal as a way to avoid the conversation, but as a temporary stay of execution until the matter can be sorted out.

I don’t like passing an $800-plus billion tax cut bill that fails to have matching spending cuts. But given the political reality facing Congress, an extension of the current tax rates in exchange for a one-year unemployment benefit extension is a fair trade so that Congress has time to pass substantive, positive reform. Whether they will in the next two years is a frustrating debate all its own.

Anthony Randazzo is Director of Economic Research


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