Do nothing: Let the Bush tax cuts expire to reduce the deficit

In a time nearly forgotten, the U.S. government not only ran a budget surplus but was expected to pay off the entire national debt within a decade. To obtain this miracle of government finance, three consecutive presidents – Reagan followed by Bush and then Clinton passed a series of tax hikes and a few spending adjustments resulting in a budget surplus by the year 1999 and a growing surplus in 2000.

It was a time when higher taxes did not sink the economy. Instead, after Clinton passed a tax increase in 1993, the economy enjoyed an epic era of economic prosperity with over eight years without a recession in sight highlighted by an unemployment rate that fell below 4 percent - a level no one thought possible only a few years earlier.

What happened to the surplus was the result of tax cuts, wars, Medicare drug coverage and even more spending, all with a complete disregard for the fiscal consequences. The catch to all of this is that the tax cuts passed in 2001 and the following years are set to expire at the end of this year. Doing nothing is easy and very effective. Allowing the tax system to revert back to the pre-Bush era would reduce the deficit by about $4 trillion, an amount consistent with the goals of the deficit hawks.
 
Sure tax increases will hurt the economy a bit. But the economy already stinks like your lab is chasing a pack of skunks around the yard – will throwing rotten eggs into the fray really be noticed? The tax increases will mostly impact the beneficiaries of the tax cuts – upper income and wealthy Americans. They will pay the majority of the increase in federal income taxes and tax hikes on capital gains, dividend and estate income. After adjustments, the middle and lower income working Americans do not pay much in federal income taxes in comparison to payroll taxes which will not change.

Many of us feel the pain of the Tea Party. Why did Washington bail out the insanely greedy banking and other financial institutions, leaving the rest of America to pay the bill? The Tea Party has its heart in the right place – a restoration of fiscal responsibility, although there is no policy to achieve the goal beyond generalities. For her next reality show, Sarah Palin should pack up the Tea Party brain trust and spend a year or two in Somalia. There they can see the application of the no tax, minimal government, Federal Reserve-less and completely free enterprise economy, of their utopian dreams.

Finally, there is the debt reduction panel put together by President Obama. A mix of reducing or eliminating popular tax breaks (goodbye home mortgage deduction), tax increases (the gas tax, raising the cap on income subject to the payroll tax), gradual increases in the retirement age, compensated by lower federal income and corporate tax rates. It would take away nearly $4 trillion from projected deficits through 2020. About the same dollar amount as letting the Bush tax cuts expire option.
 
Not surprisingly, almost everyone in Washington can find many things that they hate about the details. A note to Capitol Hill, we didn’t vote for you because we like you. You’ve got nothing to lose – take a few chances and do what is good for the country and not just for your financers. You might become a hero.
 
To be practical, the first option is the best – do nothing and let the tax cuts expire. Simple, effective and everyone can blame the other party for raising taxes. This lets the politicians and political journalists on television do what they do best. We’ve been there and it was good.

Jules Kaplan is a senior instructor in the department of economics at the University of Colorado.