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CBO's case against 'Obama's middle-class tax cuts'


Alert readers will have noticed something odd in the CBO's graph of the harm that different tax cut policies will do to the economy. On the one hand, the harm comes from increasing the amount that we borrow. On the other hand, the extension of all tax cuts -- as opposed to those just for income under $250,000 -- actually does less damage to the economy, at least under one scenario.

People can -- and will -- take issue with the CBO's model here. For instance, it holds demand-side effects constant, so the fact that lower-income folks spend while higher-income folks save isn't included. CBO says those effects tend to disappear over time. But the bottom line is that both the full and partial indefinite extension of the Bush tax cuts are bad ideas that hurt the economy (the table atop this post shows the CBO's various estimates in detail). And though the Obama administration's proposal to extend the tax cuts for income under $250,000 seemed slightly less irresponsible than the Republicans' proposal to extend all the cuts, it's also worse at generating growth.

The takeaway? Both plans are fundamentally irresponsible. The tax cuts need to be canceled. If not now, due to the temporary weakness in the economy, then three years from now.

Josh Barro has some further thoughts worth reading.

By Ezra Klein  | September 28, 2010; 4:41 PM ET
Categories:  Taxes  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: CBO: Extending the Bush tax cuts will hurt the economy, reduce incomes
Next: Reconciliation


Obama spent too much. Now he needs to increase taxes on the so-called "rich", many of which are businessowners, who create JOBS.
Even though I will never be anywhere near
"rich", I dislike anyone who thinks they
can decide what "rich" is... its a moving target. As soon as they can't get more taxes from the "rich", they'll decide if you make $100,000 that's "TOO MUCH"...then after that, government will rationalize that $50,000 is "ENOUGH MONEY FOR YOU", after all they provide you with healthcare,
and student loans, etc. !! Just Wait.

Posted by: ohioan | September 28, 2010 5:47 PM | Report abuse

agreed that they should be cancelled if not now then in 2 years. But then again this shows that there is no substantive difference between the partial cut and the full cut so why not do the full cut? Unless of course some Dems just want to stick it to the rich???

Posted by: visionbrkr | September 28, 2010 6:16 PM | Report abuse

So, if I understand correctly, the key point is that what is needed is short-term stimulus and then meaures to reduce the deficit, in other words what Orszag said.

More proof that Peter Orszag is the king of wonkitude. If wonkery was baseball Orzsag would be Ted Williams, and Ezra Klein would be...Kevin Youkilis?

Posted by: alevy02 | September 28, 2010 6:18 PM | Report abuse

CBO has always put a high estimate on impact that capital gains tax rates have on business investment, and indirectly on growth. I'm sure they have their reasons, but i don't really understand this. Experience just doesn't bear it out: I looked at data on the maximum tax rate on long-term capital gains vs. investment as a percentage of GDP from 1954 to 2009, and the correlation was insignificant in size, positive in sign (i.e. probably no relationship, and if there is any it's that higher rates are associated with higher investment). I regressed changes in the rate of investment year-to-year on the tax rate & the prior year's level of investment, and found the same thing. What's the basis for CBO's belief that lower taxes on capital are so important to growth rates?

Posted by: tomwoods | September 28, 2010 6:48 PM | Report abuse

More proof, even if it is projections in a vacuum, that the political discourse on tax cuts can not be trusted. -

Posted by: DJOURNO | September 28, 2010 6:49 PM | Report abuse

Given that Obama campaigned on a pledge not to increase taxes for anyone under $250K, politically he would probably need to push for at least a temporary extension of at least a portion of the taxes. On the other hand, this is a pretty good fight to have with the GOP. If nothing gets done the rates reset.

The worst possible outcome would be a cave that preserves all of the tax cuts permanently (permanently until a future Congress is forced to raise taxes as a matter of economic necessity). Unfortunately, this seems like a distinct possibility.

As a side note, it's possible that the Bush tax cuts will go down as the most reckless and costly piece of domestic policy in the U.S.'s history. Not only did the policy create a massive hole in the budget, its impact across the economy may very well have been a net negative too. This is pretty amazing considering that W. already holds the ignoble distinction of having the nation's worst foreign policy blunder as part of his resume. On pretty much every metric his presidency was a disaster.

Posted by: JPRS | September 29, 2010 1:54 AM | Report abuse

I never liked my economics class in high school & it shows in my lack of understanding it now. All I know is that our nation has got to get money to do things that our current deficit does not allow our Congress to do.
Bush & his GOP Congress did a real number on us. They loused us up so badly in the 8 years they ruled the roost that there is no possible way that this Democratic Congress can put it together in only 20 months. As unhappy as I am with much of what the current regime has done, they are not the disaster that another GOP regime or Congress would be for us. All of the GOP's "ideas" sound like an echo of what they did to cause to our present state of affairs. What scares me is that they seem to be proud of it!
Anyway, I look at these lesser taxes that they have been paying as a gift that Bush gave them for being so cooperative in granting his desires. It was not a "cut in taxes" but a vacation from having to pay what was truly due &, so, it was not permanent, only a temporary reprieve. In the 10 years of their reprieve, they surely reaped some riches & are a bit surly that they can not reap these riches any longer. Too Bad! Let them complain, they complain, anyway. It is time for the rest of us to get back on our feet. We need that money & we need it now, not a year or two years from now! Bush is gone & so must this tax break be gone!

Posted by: afed27 | September 29, 2010 6:20 PM | Report abuse

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