Let All the Bush Tax Cuts Expire

That's right.  I said it.  Let the taxes go up, on everybody.  The ideal political situation for Democrats, it seems is to simply increase let the tax rates for incomes above $200,000 ($250,000 for joint filers) return to the Clinton era rates while giving an Obama tax cut to the rest of us by extending the current tax rates for incomes below that amount.  That's a fine idea.  The Republican idea is to hold the Obama middle class tax cuts hostage to tax giveaways for the super-rich, to the tune of over $100,000 per millionaire.  If the Republicans plan to continue holding the Obama tax cuts hostage to the Bush tax giveaways, fine.  And at this moment, it appears that Democrats are unwilling to force a vote on this issue.

There is a third option that no one dare speak of in the current political climate: Leaving current law as is.  That would let all of George Bush's tax cuts expire, and return all of the tax rates, as the Republicans designed when the passed the 2001 and 2003 irresponsible tax policies.  We have to first be honest about what we're proposing.  The Democratic proposal and the Obama tax cut -- while I support it because it focuses the cuts on the middle class - would still cost the federal budget $3.2 trillion over the next decade (the Republican plan to give millionaires an additional $100,000 a year would add yet another $700 billion over the same period.).  And to what end?  The Tax Policy Center has the following estimates of just how much relief would be delivered by extending the current tax rates for those making $200,000 or below:
  • $5 a year for people making below $10,000.
  • $137 a year for people making between $10,000 and $20,000.
  • $503 a year for people making between $20,000 and $30,000.
  • $719 a year for people making between $30,000 and $40,000.
  • $836 a year for people making between $40,000 and $50,000.
  • $1,180 a year for people making between $50,000 and $75,000.
  • $1,936 a year for people making between $75,000 and $100,000.
  • $3,810 a year for people making between $100,000 and $200,000.
Still pretty good cuts for the middle class?  Sure.  But it hardly does anything for the poor.  On the other hand, current tax rates, as they are designed to set in 2011, would add $3.2 trillion to the federal revenue over the next 10 years.  That's an average of $320 billion a year.  In 2008, the federal government collected $862 billion in payroll taxes.  $3.2 trillion - if we did want to deprive the treasury of it - could eliminate payroll taxes over the next three and a half years.  That's on everyone - employers and employees.  And since everyone getting a paycheck pays payroll taxes, here's what would happen if we used the $3.2 trillion to eliminate payroll taxes over the next 3 and a half years.

  • Those making $10,000 a year would get an extra $765 for each of those years.
  • Those making $20,000 a year would get an extra $1,530 for each of those years.
  •  Those making $30,000 a year would get an extra $2,295 for each of those years.
  • Those making $40,000 a year would get an extra $3,060 for each of those years.
  • Those making $50,000 a year would get an extra $3,825 for each of those years.
  • Those making $75,000 a year would get an extra $5,737 for each of those years.
  • Those making $100,000 a year (or more) would get an extra $7,650 for each of those years.
By the way, if the payroll taxes were only eliminated on employees, these amounts would last for seven years.  Oh, but you say, this is only over the next three and a half years (or seven).  Yes, they are.   Want to extend them over a 10 year period?  That would be about a third of the amounts above, which is still a greater amount for most people who pay payroll taxes than the income tax cut expansion.  If we want an ailing economy a jolt by the means of a tax cut, cutting payroll taxes is a much more effective method than cutting income taxes, since everyone pays payroll taxes and thus would see a benefit.  This could spur both consumer spending and hiring at a great rate and get our economy moving at a good pace again.

Let's say we didn't want to eliminate the payroll taxes.  $3.2 trillion is still $320 billion a year.  $320 billion is more than the budgets of the Departments of Transportation, Labor, Interior, Education, Energy, HUD, Veterans Affairs, the Environmental Protection Agency, the Small Business Administration, and NASA.  Combined.  We could invest in a national infrastructure project and double our federal investment in education and still have money left over that could be used for a massive public works project putting more people to work, paying down our national debt and more.  Heck, or we could use the money to expand the subsidies for the health care exchanges that will open in 2014 for truly universal coverage.

Bottom line, the $3.2 trillion over 10 years can be used in myriad of ways that will benefit the economy and the middle class in far better ways than extending income tax cuts.  Letting all the tax cuts expire, as opposed to letting them all be extended, will also return our tax code to be somewhat progressive, where the tax responsibility is better distributed.

As I said at the outset of this article, I support extending the tax cuts for the middle class under current law, if only because it would give some relief to middle class families without requiring a re-thinking of our taxing and spending priorities.  But it does not make any policy sense to allow the rich tax giveaways to happen just to extend those tax rates.  Democrats should not acquiesce to Republican demands.  If the Republicans want to force that choice by the means of a filibuster of the Obama tax cuts, Democrats ought to simply let current law, as written by Republicans in the early 2000's stand, and let all the income tax rates resume to the 1990s rates, and then start thinking about better ways to invest that extra revenue.