TOPICS > Economy

Who Would Benefit From Extending Bush-Era Tax Cuts?

September 9, 2010 at 4:16 PM EDT
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Whether the tax cuts enacted under the latest Bush presidency should be extended past the Dec. 31 expiration date is slated to be a key policy issue debated as elections approach. Jeffrey Brown gets two views about extending the cuts and whether it would mostly benefit the wealthiest Americans.
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JIM LEHRER: And to one of the biggest of the policy debates of the coming months: whether to extend Bush era tax cuts.

Jeffrey Brown has that story.

JEFFREY BROWN: The tax cuts in question were signed into law by President Bush in 2001 and 2003. Unless extended by Congress, they will expire on December 31 and rates would rise across the board.

This week, President Obama announced he favors keeping the current rates for the majority of American households: those with incomes below $250,000 for couples and $200,000 for individuals. But the president wants to end the cuts for top earners, whose income tax rate would go from 35 percent to the pre-2001 standard of 39 percent. Republicans are resisting that move.

U.S. PRESIDENT BARACK OBAMA: They say no. And the reason is, they’re holding all those middle-class folks who need tax relief hostage right now, in order to provide tax breaks for the top 2 percent.

JEFFREY BROWN: GOP leaders have called for extending all the cuts for at least two years, arguing that too many Americans will be hurt at a time of economic stagnation.

SEN. MITCH MCCONNELL (R-KY), minority leader: This particular tax increase that he has in mind that he will characterize as a tax increase on the wealthy, in fact, impacts 50 percent of small business income, 25 percent of the work force.

JEFFREY BROWN: The issue is already being hotly debated in midterm election races, and will likely come to a head after the November results are in.

And we hold our own debate on this question now with Heather Boushey, senior economist at the Center for American Progress, a liberal policy group in Washington, and Jeffrey Miron, an economist at Harvard University and a senior fellow at the libertarian Cato Institute.

Heather Boushey, what’s the economic argument for doing what the president wants and letting the tax cuts for top earners lapse?

HEATHER BOUSHEY, senior economist, Center For American Progress: Well, the important thing right mow is that the economy still needs customers. We still need people to go out there and spend money.

And what the president has proposed is that we keep those tax cuts for middle-class families, the families that are going to spend the money, the — those extra dollars in their pocket, but you let them expire for the folks at the very top.

We saw over the 2000s that those tax cuts for the wealthiest Americans didn’t lead to strong economic growth, didn’t lead to strong investment, didn’t lead to strong job gains. And, so, we know that those folks aren’t going to spend that money. They’re not going to do as much as focusing those dollars on the middle class, where it can have the most bang for the buck right now.

JEFFREY BROWN: They’re not going to — that money doesn’t stimulate the economy; that’s the argument.

HEATHER BOUSHEY: That’s the argument, that, if you keep tax cuts for the wealthiest, it won’t stimulate the economy, but it will add to the deficit.

And, really, what we have to be focused on right now is what economists would call the opportunity costs. We spend those dollars on tax cuts for the wealthiest, there’s things we can’t do with them, such as spending money on infrastructure or small business tax cuts that would really help boost the economy right now.

JEFFREY BROWN: All right, Jeffrey Miron, you — you favor extending all the tax cuts. What’s the — what’s the evidence that it does stimulate the economy, especially those top earners?

JEFFREY MIRON, economics professor, Harvard University: Well, we have had lots of evidence on the short-run stimulative effects of tax cuts. The best evidence is recent evidence from David Romer and Christina Romer, who just resigned as President Obama’s chair of the Council of Economic Advisers.

They found very strong positive effects on the economy from tax cuts, whether they were middle-class, upper-income, or whatever. The second thing I would emphasize is that it’s not just about the short run. It should also be about setting the right incentives in place for the longer term.

And the high rates on high-income earners are a disincentive to work. They’re a strong incentive to try to evade or avoid taxes by having income paid in sort of ways which are not taxed. And we should remember that it’s not just the marginal rate from the federal income tax that high-income earners face. They also face state income tax rates. They’re going to face higher rates from the federal government because of new taxes in Obamacare.

So, you’re going to have marginal rates, well in excess of 50 percent. Those are serious disincentive to effort and a serious incentive to hide income. That’s very bad for the economy, both in the short term and in the long term.

JEFFREY BROWN: All right, well, Heather Boushey, respond to that, but also this — the question — the other question out there, who is going to be most impacted? Partly, this is a question of the small businesses. How would the impact play out here?

HEATHER BOUSHEY: Well, the tax cuts that we’re talking about today are not going to affect the kind of small businesses that you and I think about, sort of the mom-and-pop store on the corner of my block. Those typically aren’t the folks who are going to be affected.

Ninety-seven percent of tax filers who have small business income won’t be affected by these tax cuts, by these — by allowing the tax cuts to expire. So, it’s that top 3 percent who really bring in the bulk of the money that will be affected.

So — but I think, again, the thing that we have to remember is, where this economy is right now, we are still in a situation where we don’t have enough demand. What we see in survey after survey from small businesses is that they’re not seeing enough sales.

They’re wondering, you know, where are the customers coming through my doors? And so we need to target our policy response to help those small businesses see sales. And giving — extending the tax cuts for middle-class families will help put more customers in the door, in the way that targeting them at the top end simply won’t do.

JEFFREY BROWN: But then, of course, the question, why not — why not end all the tax cuts? I mean, why not end it for the middle class as well? And your argument there is — goes to the deficit question.

HEATHER BOUSHEY: Well, certainly, but we know that folks in the lower and middle classes are more likely to spend every dollar that they get, so — because they don’t have a lot of wiggle room. They don’t have a lot of savings. They don’t have a lot of excess money.

So, when they get that dollar, when they get to keep that extra dollar in those tax cuts, they will be more likely to go out and spend them. Those folks at the very top, they have got a lot of excess resources, and so they’re not going to spend that full dollar.

JEFFREY BROWN: Now, Jeffrey Miron, where do you come out on this small business question of the impact here? Who would be impacted?

JEFFREY MIRON: Well, it’s certainly right that the large majority of the things that we typically are thinking about when we say small business, they are unlikely to be affected by the tax increases on the high-income earners.

So, a small mom-and-pop grocery store does probably not have an income high enough to be affected. But there’s a large amount of income — a recent estimate published in The Wall Street Journal — roughly 50 percent of income earned by smallish sort of companies — these are things that are Subchapter S corporations, partnerships and so on, that are neither these large corporations, nor the very, very small mom-and-pops.

They earn a lot of the income that would be affected by these higher tax rates. And these are precisely very energetic, startup types of companies that contribute a lot to hiring, that contribute a lot to entrepreneurship, that contribute a lot to innovation.

So, these higher tax rates are definitely a disincentive for them to be able to engage in those activities and contribute in an important way to the economy.

JEFFREY BROWN: And what about — staying with you, what about the other question that Heather raised earlier about the opportunity — what she called the opportunity costs?

And we have seen the president has put some other proposals on the table, some business tax incentives that he wants to do. Why not use the money from what he wants to do for other things, more directly to help businesses?

JEFFREY MIRON: Well, certainly. First, I don’t think that they’re mutually exclusive. The permanent credit for research and development, I have zero objection to whatsoever.

First of all, I like that fact that it’s permanent, so it gives businesses a long-term plan that they can work with. They know what to expect. They don’t have to think about doing something right now because some tax credit’s going to expire, even though it might make sense for them to postpone it for a year or two and do it when it’s more advantageous for them.

The full expensing of investment, which will take place in 2011, but only 2011 under the president’s proposal, that’s in the right direction, and it does encourage more investment to happen sooner. But it mainly is going to shift when investment occurs, because businesses are going to have to pay for that investment by depreciation — were going to be able to deduct that anyway by depreciation allowances.

And the only benefit, therefore, is they that don’t have to borrow in order to be able to do the investment now. But interest rates are so low, that that’s a very small effect. So, I have no objection in principle, but I don’t think that’s going to do very much to stimulate the economy.

JEFFREY BROWN: And, Heather Boushey, your argument is that what the president is proposing vis-a-vis these business incentives is a more direct stimulus?

HEATHER BOUSHEY: Well, certainly, it’s more direct than just giving money to rich Americans. You know, rich Americans aren’t necessarily the same people who create jobs. And targeting money at businesses certainly targets it better at people who are doing job creation.

But, of course, the other thing that is on the plate that the president has been talking about is directing more money towards infrastructure, which gets at the long-term issues that we have just been talking about.

We do need to make those investments in our economy. And a lot of those investments in infrastructure, in roads, in railways, in airports, these are all things that help businesses, large and small, transport people and goods and services around our economy. So, that’s all — those are all the kinds of investments that we need to be making, which will also, at this juncture, boost job creation.

JEFFREY BROWN: All right. This debate will continue, and we will follow it.

Jeffrey Miron and Heather Boushey, thank you both very much.

HEATHER BOUSHEY: Thank you.

JEFFREY MIRON: Thank you.