Domestic Taxes

Calls to extend Bush tax cuts face difficult pay-as-you-go reality

Democrats who are seeking to extend tax cuts for the wealthy
enacted by President George W. Bush might be creating a “Sophie’s Choice”
scenario when it comes to paying for their cost.

Pay-as-you-go rules stipulate that extending tax breaks for
individuals making more than $200,000 annually or couples earning more than $250,000 cannot
add to the deficit. 

{mosads}But in the limited universe of politically palatable
offsets, lawmakers will have to choose between paying to extend these tax
breaks or using the revenue for another initiative that might be nearer and
dearer to the hearts of their constituents.  

“To extend the tax breaks above 200[K] and 250[K], it has to
be paid for under statutory PAYGO, and that takes money from other purposes,”
said House Ways and Means Chairman Sandy Levin (D-Mich.).

House Majority Leader Steny Hoyer on Friday said extending
the so-called Bush tax cuts for the wealthy would require $676 billion in

Levin argues that revenue would be better spent offsetting
initiatives that help stimulate the economy.

“We have to pay for further job stimulus and we have to pay
for extending the high income tax cuts. So the question is: How do we best use
the money?” he said. “Extending the tax cuts for the very wealthy and paying
for them is not the best way to create jobs.”

Hoyer and Speaker Nancy Pelosi (D-Calif.) also say the tax
cuts for the wealthy should expire on schedule at the end of the year.

Chuck Marr, director of Federal Tax Policy at the Center on Budget and Policy Priorities, told The Hill that allowing the upper brackets to
reset at higher rates could provide revenue for programs to stimulate the

“You sunset those tax cuts and lock in the long-term
savings, but use the short-term savings and dedicate that money to policies
that are a more efficient [stimulus],” he said.

Marr said additional tax relief for small businesses or
increased support to state and local governments would be a good use of the
revenue that would be captured by allowing the top-end tax rates to expire.

“Those things are much more efficient than extending the
high-end tax cuts,” he said.

However, concerns over the economy have added considerable
political pressure to Democrats seeking reelection who wish to avoid the “tax
increaser” label in the run-up to November. That pressure might force
Democratic leaders to rethink their position on extending the upper brackets,
at least temporarily.

A one-year extension of the top two brackets would cost
approximately $40 billion, according to some estimates, and would be much
easier to offset than Hoyer’s $676 billion figure.

Lawmakers could also circumvent pay-as-you-go rules
procedurally if 60 senators agree that, because of the slowdown, paying for a
temporary extension of the upper brackets would create a drag on the

“If the idea is to have some sort of stimulus, you wouldn’t
want to pay for it,” Marr said.

The Tax Relief Coalition on Friday blasted the idea of
enforcing the PAYGO rule in the context of extending tax cuts for the wealthy.

“Unyielding adherence to PAYGO virtually ensures that every
discussion of tax policy becomes mired in the rhetoric of class warfare,” it
stated in a letter sent to Congress. 

It also warned that small-business owners would bear the
brunt of a tax increase on the top two rates.

“Despite the importance of these small businesses to the
U.S. economy and American jobs, they will bear a substantial portion of the
higher tax rates,” the letter states. “About one-quarter of taxpayers who
derive at least 50 percent of their income from a flow-through business will be
subject to the higher tax.”

A growing chorus of Democratic lawmakers in both chambers
wants to extend the top rates until the economic crisis subsides. Senate Budget
Committee Chairman Kent Conrad (D-N.D.) is chief among them.

“The general rule of thumb would be you’d not want to do tax
changes until the recovery is on more solid ground,” Conrad said.

An economic rebound also does not appear in the offing,
according to several reports.

Fannie Mae’s July 2010 Economic Outlook reduced its
projection for economic growth this year to 2.8 percent from 3.2 percent, and
remains on guard for additional downgrades.

The report states that concerns about the global economic
recovery, including lingering worries regarding European sovereign debt, and
increasing caution domestically among private employers and consumers has had a
chilling effect on economic activity.  

“We have shifted into a lower gear in the economic
expansion, due in no small part to the increase in financial-market volatility
in recent months,” said Fannie Mae Chief Economist Doug Duncan in prepared
remarks. “As a result, private-sector employers are tentative about hiring
decisions; businesses are building cash, but generally are investing in capital
rather than labor. That reluctance to hire has had a knock-on effect on
consumers, who are spending less as the deleveraging process continues.”

Former Federal Reserve Chairman Alan Greenspan recently said
that wealthy individuals have helped propel the economy forward. Some lawmakers
have suggested a tax increase on this sector could worsen the economic

Levin doesn’t buy it.

“You’ve got various reports including that the wealthy have
reduced their spending,” he said. “I’ll read all the economic reports and I’ll
look at all of the various arguments. But we need to strengthen job creation.
And my own view is that the high income brackets should be allowed to expire.”


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