James Pethokoukis

Politics and policy from inside Washington

Forecasting the Bush tax cuts

August 17, 2010

Wall Street’s conventional wisdom is that markets like political gridlock — but not if inaction means hitting a weak economy with a big tax hike. When Congress returns from vacation, it needs to deal with the expiring tax cuts signed by President George W. Bush. The Obama deficit panel, however, could limit any extension of them.

The Obama administration says it wants to extend only that portion of the 2001 and 2003 tax cuts affecting the middle-class. Doing so would cost $1.3 trillion over 10 years, according to the congressional Joint Committee on Taxation, not counting borrowing costs. Allowing upper-income rates to rise on investment and labor income, on the other hand, is predicted to generate about $678 billion over 10 years.

Few in Washington want to let all the cuts disappear at year-end. Doing so could potentially knock between 1 and 3 percentage points off GDP growth next year, according to various estimates. But that will be the undesired outcome if Congress can’t reach agreement. While most Republicans want to keep all the 2001 and 2003 Bush tax cuts, President Barack Obama and most congressional Democrats want to let the ones for the richest expire. Treasury Secretary Timothy Geithner says he’s confident the fledgling economic recovery could withstand the blow.

But news of decelerating U.S. growth is hardly helping his argument. And given voters’ anxiety about the economy, Congress – with the entire House and a third of the Senate up for reelection in less than three months – might not be quite as risk tolerant as Geithner. A new NBC News-Wall Street Journal survey finds 71 percent of respondents would accept extending all the tax cuts until the economy recovers.

The political calculus is complicated. Congressional Democrats trying to follow the Obama plan could hold a pre-election vote. But Republicans would likely reject a permanent middle-class extension if the upper-income tax cuts weren’t also included. If Democrats offered a full, temporary extension, the GOP would probably accept that compromise. Such a deal would run contrary to the White House’s intentions — but Obama hasn’t vowed a veto either.

Muddling matters further is the president’s deficit commission. One recommendation could be to cut future Social Security spending in exchange for expiry of Bush tax cuts for the richest. That means even an agreement on a one- or two-year extension could get partly overwritten soon after. The only thing for sure is that following the messy passage of stimulus, health care and financial reform, the battles aren’t getting easier. And the tax debate isn’t doing anything to help clarify America’s cloudy economic outlook.

Comments

i think everything could be left as is even go back and leave health care as it was and im going to tell you how to pay off thedeficit in our budget within 6 years and know one has to suffer and the economy will pick up.heres how we as a nation can pay off the national debt.if every one in control of the program im about to mention and be honest this will work here goes.start a national lottery with.this will include all 50 states make the tickets 5 dollars each.no matter how high it gets and its going to get enourmously high never let any winner win more than 500 million dollars. with 50 states involved it would be100 billion dollars every week. check it out ive done the math it would pay off the deficit in 6 or 7 years it would create thouands of jobs across the country there would even be sn
mall bussines open up to sell gas and lottery tickets have the drawing weakly drawing 6 numbers only only the 6 winning nubers not paying 5 numbers or 4 numbers ive talked to many people they all agree that this would work if it is done honestly and half of congress and legislatures and even the president would keep their hands out of the pie.if i could get elected to congress i would run on nothing but this platform alone and explain and show how it would infact pay off the deficit.thinkit would only cost260dollars a year for the peole that bought a ticket every week and there would be at least.250millionamericans buy a ticket and thats probably a low estimate. when that thihg gets on up there and everybody knows they could possibly win 500 million dollars they are going to buy tickets thank you

Posted by happypawpaw | Report as abusive
 

i think everything could be left as is even go back and leave health care as it was and im going to tell you how to pay off thedeficit in our budget within 6 years and know one has to suffer and the economy will pick up.heres how we as a nation can pay off the national debt.if every one in control of the program im about to mention and be honest this will work here goes.start a national lottery with.this will include all 50 states make the tickets 5 dollars each.no matter how high it gets and its going to get enourmously high never let any winner win more than 500 million dollars. with 50 states involved it would be100 billion dollars every week. check it out ive done the math it would pay off the deficit in 6 or 7 years it would create thouands of jobs across the country there would even be sn
mall bussines open up to sell gas and lottery tickets have the drawing weakly drawing 6 numbers only only the 6 winning nubers not paying 5 numbers or 4 numbers ive talked to many people they all agree that this would work if it is done honestly and half of congress and legislatures and even the president would keep their hands out of the pie.if i could get elected to congress i would run on nothing but this platform alone and explain and show how it would infact pay off the deficit.thinkit would only cost260dollars a year for the peole that bought a ticket every week and there would be at least.250millionamericans buy a ticket and thats probably a low estimate. when that thihg gets on up there and everybody knows they could possibly win 500 million dollars they are going to buy tickets thank you

Posted by happypawpaw | Report as abusive
 

Congress should expire the tax cut. The wall street survey suggested 71% of respondents accept extending all the tax cuts. Who are these 71%? Who is exactly dealing with wall street and respond to their survey? For sure its not ordinary Americans. Be responsible and share the pain with ordinary Americans. The Bush tax cut for the rich didn’t help the country, as they have claimed – creating jobs. How would one create job on tax cut? To me it was a bogus claim.

Posted by tebeber | Report as abusive
 

Can’t spend other people’s money with a tax cut. The Obama government likes to spend others people’s money. It’s called spreading the wealth.

Posted by authorondo59 | Report as abusive
 

The truth is: America can’t afford tax breaks… for anyone.

We should remove as many tax breaks as possible from the tax code. Simultaneously, we should cut spending… really cut spending… like we really mean it.

In order to give anyone a tax break, rich or poor, private or corporate, we have to borrow the money from China or print money that previously didn’t exist.

We need to start living within our means. I actually think that it would stimulate the economy, because people might start believing that the economic system has been put back in order so that it might finally be able to function again.

Posted by breezinthru | Report as abusive
 

Every thing we pick up says, Made in China. Soon our money will say made in China. A little on the light side, when you pick up a fortune cookie, it says Made in New York.
I agree with the top comment. I have suggested to my congress rep. that a national lottery would be the answer. People would much rather give money freely than be taxed. Bringing in more money should go hand and hand with cutting expenses. I think and always have that we should spend more time protecting our borders than going head first into a war for political reasons, (my opinion). We have lost respect around the world and it continues because we are so arrogant as to not wait on United Nations sanction. I believe we are in a war just like Vietnam. When we are fighting people who will never quit, as in Vietnam, how can we win. I am saddened over all the young men and women giving their lives every day. Remember several years ago when South Korea was burning our flag and saying, Yankee go Home. That has changed now. We can not and should not try and police the world. We went into Iraq supposedly over weapons of mass destruction and take out Saddam Hussein. We did and I think should have brought our troops home. We can not make every country a democracy, (actually we are a Republic).

Posted by azbycx | Report as abusive
 

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