Since the Democrats have set themselves up for an election-year tax-cut brawl, this article on the little-known realities of Bush administration's signature tax cuts is worth reading. For instance, no, letting the cuts for upper-income brackets expire won't hurt small business. Perhaps more surprising to some, the tax cuts have actually slowed economic growth since they were enacted.
Howard Gleckman at the Tax Policy Center also has some observations on the policy and politics of the tax cuts, predicting that Congress will follow the Obama administration's proposals and "extend the Bush tax cuts for all but the highest earners. And it will probably do so for a year or two. But after watching Congress fail to address the expiring estate tax last year, no outcome would shock me." That sounds about right to me, and it's probably an ideal compromise to nurse the nascent recovery -- while tax cuts aren't the best stimulus out there, the political reality is that the morally horrifying "new normal" of doing nothing to solve the unemployment problem means that we need to foster growth however we can.
But the estate-tax precedent Gleckman mentions might work out, at least in favor of budget wonks. When Congress failed to address the estate tax, it was abolished for a year. In the case of the Bush tax cuts, if Congress finds itself gridlocked, all the tax cuts expire, including those for the middle class. This would violate an Obama campaign promise not to raise taxes on anyone making less than $250,000, but it would also set the stage for actual tax reform: A potential outcome that neither party will benefit from politically (both parties could plausibly blame the other for the rollback) could bring both sides to the table after the election to deal with the necessity of fixing our poorly designed tax code.
-- Tim Fernholz
