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The expiring tax cuts

Political attention is beginning to focus on the expiring Bush-era tax cuts, so perhaps I should weigh in. The Obama Administration, presumably for reasons of political cowardice (or to put it more kindly, prudence), purports to favor generally extending them except for the top bracket. The Republicans, of course, want to extend all of the tax cuts forever, though probably that's just for starters. They also want vastly increased tax cuts with no financing and no meaningful cuts on the outlay side (at least none they are willing to acknowledge, beyond the occasional Congressman Ryan - who falls way short despite going way beyond what the rest of them would actually do).

Let's analyze this in two parts. First, suppose there were no ongoing recession with shockingly high unemployment that is projected to continue almost as far as the eye can see (exacting enormous social costs that may last far longer than the high unemployment itself). Then, what about the recession and need for stimulus rather than contraction.

Absent the recession, the thought of extending any of the tax cuts would be ludicrous. We are faced with an enormous and growing fiscal gap. There is no indication that the political system can deal rationally with it. The idea of massively cutting taxes relative to the current law baseline verges, against this background, on being criminally negligent.

But is eliminating the tax cuts and generally restoring pre-2001 law really the best way forward? Was the tax law at that point in some kind of Periclean golden age, an acme of perfection? Of course not. So there is plenty to discuss, in terms of revenue-neutral (or better still revenue-raising) tax reform relative to that baseline. Or rather, there would be plenty to discuss if there was anything to discuss, which there isn't for political reasons.

Extend the income tax cuts and enact a VAT instead? Enact a 1986-style base-broadening exercise but with general savings incentives (i.e., consumption tax-type treatment without creating inter-asset distortions)? Enact a carbon tax for revenue as well as global warming reasons? General base-broadening in lieu of the rapidly growing AMT? All these things and more could be on the table, but of course they aren't.

Okay, but what about the recession? Extending the tax cuts is, to a marginal degree, stimulative relative to not doing so. But it is poorly designed as stimulus. If there were any political point to even thinking about it, I might consider a short but finite (and credibly expiring) extension of the tax cuts, plus tax increases (such as a VAT) with postponed effective dates to stimulate sooner activity, plus the much better designed conventional fiscal stimulus that people in the Krugman-DeLong camp are advocating, plus credible long-term retrenchment in entitlements growth, plus a carbon tax. And then on to fundamental tax reform within the revenue parameters. Etcetera.

But in a country with a failing political system there's not a whole lot of point that I can see to nailing down one's preferred details.

If only I liked gardening, like Candide ...

Full post as published by Start Making Sense on July 26, 2010 (boomark / email).