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Tax cuts not the way to fix economy

By Diane Lim Rogers, Special to CNN
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STORY HIGHLIGHTS
  • Diane Lim Rogers says Obama proposes letting tax cuts for wealthy expire
  • He calls them too expensive, she says, but they're small compared with larger middle-class cuts
  • The CBO has put extending tax cuts at bottom of list of ways to spark economy, she says
  • Rogers: U.S. should seek other fiscal stimulus ideas as substitutes for Bush tax cuts

Editor's note: Diane Lim Rogers is chief economist at the Concord Coalition, a nonprofit, nonpartisan grass roots organization advocating fiscal responsibility. She is also a mother of four and blogs about a range of topics from tax policy to tuition bills at EconomistMom.com.

(CNN) -- President Obama proposes to let the Bush tax cuts for the rich expire as a way of "saving" $700 billion over the next 10 years. He says that our nation cannot afford those cuts, given the unsustainable outlook for the federal budget and the threat it poses to both our short-term and long-term economic health.

But that savings is just a fraction of the $2.2 trillion cost (without interest) of the generously defined "middle-class" portions of the Bush tax cuts, which President Obama does want to extend.

The president's choice to continue most of the Bush tax cuts is puzzling. He has repeatedly blamed the Bush tax cuts for the fiscal mess he inherited and rightly points out that they did our economy little good -- and a lot of bad -- over the past decade.

How can it be that the deficit-financed Bush tax cuts in their entirety were so bad for our economy up until now, yet extending the bulk of those cuts from this point forward is suddenly a good idea?

Video: Tax cut divide
RELATED TOPICS
  • Taxes
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The leading response seems to be because now -- with a weak, short-term economy and high unemployment -- is "not the time to raise taxes on anyone." This is accompanied by the suggestion (if not yet concrete proposal) that we could let some or all of these extended Bush/Obama tax cuts expire later, to avoid harm to the long-term economy from the higher deficits they would create.

But these rationalizations for how the bad Bush tax cuts would suddenly -- at the stroke of Obama's pen -- become the good Obama tax cuts aren't really rational at all.

Even only temporary extension of just the middle-class portions of the Bush tax cuts would be a second-best solution to both the need for more short-term stimulus and the need to regain fiscal sustainability over the longer term.

In the short term they have far from the greatest stimulative "bang per buck" you would want from deficit-financed fiscal policies, in terms of boosting demand for goods and services and creating jobs for workers who produce those things.

And the only temporary extension is not the best solution to the longer-term deficit problem, mostly because our government is really bad at letting expiring tax cuts actually expire -- or for that matter letting any scheduled improvements to the fiscal outlook actually happen.

So it's likely that extending the Bush tax cuts and turning them into the Obama tax cuts will commit us to many more years of lost revenue that dramatically increases the deficit, reduces national saving and harms economic growth.

The Congressional Budget Office has explained in its budget and economic outlook report that continuing the Bush tax cuts would indeed help (not hurt) the economy over the next couple of years by encouraging greater demand for goods and services.

But the CBO has also shown that the cuts, whether including those to the rich or not, are near the bottom of the list of various deficit-financed spending and tax policies that would be effective for fiscal stimulus. Expanded unemployment benefits, payroll tax holidays and temporary investment tax credits are some of the policies that top the list.

We ought to be considering alternative forms of fiscal stimulus as substitutes for, rather than additions to, the extensions of any portion of the Bush tax cuts.

Substituting policies that better satisfy the "three Ts" in being "timely, targeted and temporary" would maximize the stimulative bang per buck in the short term. And it would avoid an additional, more permanent increase in the deficit that could undermine the longer-term economic effects.

Once the economy has fully recovered from the past recession, deficit-financed extension of the Bush/Obama tax cuts would not just be "not the best" policy; it would be bad policy.

The CBO has shown that the adverse effects of higher deficits on national saving would begin to outweigh any positive effects of slightly lower tax rates on private-sector economic activity beyond the first couple of years.

Thus, permanent extension of the Bush/Obama tax cuts would eventually lower the economy's size and its growth rate.

If we really want to use federal tax policy to encourage longer-term economic growth, we should engage in fundamental tax reform that broadens and levels out the tax base, and at the same time doesn't cut tax revenues but actually raises them to more adequately cover our ongoing and growing spending needs -- which will keep growing even with successful health care reform.

It's not that extending the Bush tax cuts and turning them into the new "Obama tax cuts" wouldn't have any benefit for the economy. It's that for whatever economic goal you can think of, whether short-term or longer-term, there's some fiscal policy even better suited for that goal than extending the cuts.

The Bush/Obama tax cuts aren't good for nothing. They're just "best" for nothing. And as constrained as we are, we should be aiming at least to do better.

The opinions expressed in this commentary are solely those of Diane Lim Rogers.