National

Tax debate centers on highest-paid 3%

WASHINGTON — On this, economists agree: Extending tax cuts passed under President George W. Bush for low- and middle-income people would strengthen the weak economy.

The question is what to do about the highest-paid 3 percent of taxpayers. Should Congress let their tax cuts expire at year's end as scheduled? Extend them for only a while? Or make them permanent?

It isn't just a debate over how much money high-income Americans should get to keep. It's about how much their tax cuts might aid the economy. And how much they'll affect the budget deficit years from now.

But first, consider what would happen next year if Congress let the tax cuts for everyone expire as scheduled. According to Moody's Analytics, the deficit would drop to $732 billion. That's well below the $1.3 trillion deficit for the budget year that ended Sept. 30.

At the same time, the economy would suffer, Moody's says: Growth would tail off to just 0.9 percent next year. That's scarcely more than a recessionary pace. And unemployment would average 10.7 percent next year.

That's because higher taxes would leave people with less money to spend. Businesses would be less inclined to hire. Economic growth would slide. Yet if Democrats and Republicans can't reach a deal during the post-election lame-duck session that began this month, taxes will rise across the board in January.

Republicans triumphant in the midterm elections insist that everyone, regardless of income, should continue to enjoy the tax cuts approved during George W. Bush's presidency.

President Obama wants to extend the tax cuts for individuals with taxable incomes below $200,000 a year and couples with incomes below $250,000. Taxable income is a taxpayer's total income minus allowable deductions and exemptions.

Obama has long argued that income above those levels should be taxed at the higher rates that existed before 2001. Yet since his party suffered major losses in the elections, Obama has signaled a willingness to compromise. The White House has indicated he is open to a one- or two-year extension of the tax cuts but opposes a permanent extension for the highest earners.

Allen Sinai, chief economist at Decision Economics, fears that letting the tax cuts for high-income Americans expire could reduce the flow of money into private equity firms, venture capital and other investments that "grease the wheels of entrepreneurship in the U.S. economy."

Under Sinai's estimates, extending the tax cuts for all would provide the biggest boost to spending and growth. People and businesses would know they could count on the money in the future.

Yet even if the tax cuts were extended for everyone, unemployment would still be expected to rise next year. Economic growth still wouldn't be robust enough to create enough jobs.

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