Debate over the 2001/2003 Tax Cuts Heats Up

Debate over the 2001/2003 tax cuts is centered on its economic and budgetary aspects and effects. The President has proposed extending the tax cuts only for individuals earning less than $200,000 and couples earning less than $250,000, while letting the tax cuts for individuals and couples above the designated income bracket expire. CBO reports that extending all of the 2001/2003 tax cuts would cost $2.7 trillion over the 2011-2020 period (excluding AMT patches and added interest payments), using the CBO current law baseline as the starting point. The public is also weighing in and is divided. An August 20th CNN Poll found that 51 percent of Americans are in favor or letting the tax cuts expire for families making more than $250,000 while 31 percent oppose such a measure. The Senate is reported to be taking this issue up when it reconvenes in September. In the meantime, many questions have been raised—and opinions have been asserted—about the feasibility, benefits, and consequences of these tax cuts.

Here's what some lawmakers and economists have been saying:

• CBO wrote in its most recent Budget and Economic Outlook Update that while the tax cut extentions would be beneficial for short-term economic growth, longer-term growth would suffer.
• Mark Zandi recently wrote an op-ed for the New York Times in which he argues that some of the tax cuts should be extended through 2011, but be only made permanent for the middle class and working poor while slowly phasing back in tax increases in 2012, after the economy recovers.
• Paul Krugman recently weighed in on the debate. Krugman makes the point that the benefits of the tax cuts, if fully extended, would "nearly all...go to the richest 1 percent of Americans, people with incomes of more than $500,000 a year." He claims that the political culture is "dysfunctional and corrupt" and wonders why Congress claims it lacks revenue to pay for funds "protecting the jobs of schoolteachers and firefighters" yet many are willing to extend all of the 2001/2003 tax cuts.
• Merrill Lynch chief North American economist Ethan Harris is quoted as writing a report saying that the expiration of the 2001/2003 tax cuts would result in a 1.3 percent annual GDP hit.
• William G. Gale wrote about what he refers to as five myths about the Bush tax cuts.

CRFB believes that if lawmakers and economists agree that any or all of the tax cuts should be extended, the costs of doing so should be fully offset. Otherwise, their long-term cost to the nation’s debt and the resulting drag on economic health could far outweigh any short-term gains.