News Columns & Blogs

Pro-con on extending all Bush tax cuts

There is mixed evidence of how much individuals react to tax changes, but we do know that taxpayers (especially wealthy ones) do not like uncertainty. Given the fragile state of the economy, the uncertainty of tax rates may do more damage to a recovery than a limited increase in the federal deficit associated with extending the tax cuts for one or two years. If taxpayers are uncertain about the tax cuts, they may save a larger share of their income to enable them to deal with the "unknown" tax changes. Businesses are less likely to develop and act on investment plans in the face of tax uncertainty. The combined impacts could further sour the sentiment about the recovery and hinder economic growth even further. — Sally Wallace, Georgia State University

President Obama is proposing legislation that would keep tax rates essentially unchanged for 98 percent of Americans but allow rates on the richest 2 percent to rise. But Republicans are threatening to block that legislation, effectively raising taxes on the middle class, unless they get tax breaks for their wealthy friends. So should Democrats give in? On the economics, the answer is a clear "no." The GOP plan would add hugely to the deficit — about $700 billion during the next decade — while doing little to help the economy. On any kind of cost-benefit analysis, this is an idea not worth considering. And, by the way, a compromise solution — temporary tax breaks for the rich — is no better; it would cost less, but it also would do even less for the economy. — Paul Krugman, New York Times