What should Congress do? Right now, nothing. Why should Congress do nothing? Because if Congress does nothing then the Bush Administration tax cuts for the wealthiest of Americans will expire and this will recover much needed revenue and help reduce the budget deficits. Except for the first time during the course of the Obama Administration Congressional Republicans actually want to do something: extend the Bush Administration tax cuts and some believe they should be made permanent.
If tax legislation is passed all the tax cuts passed under Bush Administration in 2001 and 2003 will expire. The tax rates would then revert at the end of the year, with the top marginal income tax rate rising to 39.6% from 35%, and other corresponding rates for lower income brackets would also increase. There basically have been three different lines of thought on the Bush tax cuts, and that has been to either let them all expire, let some of them expire, and to let none of them expire. Generally speaking liberal Democrats have been making the case to allow the tax cuts to expire, while conservative Democrats have been arguing to allow some to expire but maintain the lower tax rate cuts. Of course Republicans have been arguing that they should all be extended.
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Let's review what the Bush tax cuts actually accomplished, because there has been a lot of pontificating by conservatives, both intellectual and not so intellectual, about the accomplishments of the Bush tax cuts. The Bush tax cuts did not have the broad positive effect on the economy that is often claimed. According to an analysis by the Center for Budget and Policy Priorities, the growth rates of GDP, investment, and other key economic indicators during the Bush era economic expansion were below the average for other post-World War II economic expansions. Although one section of the economy in particular benefited greatly from the Bush tax cuts: corporate profits. Comparatively the Clinton era tax increases preceded far more board economic growth than did the Bush era tax cuts.
Another talking point being used by conservatives is that the expiration of the Bush tax cuts will hurt small business. However, it is not entirely clear if the Bush era tax cuts actually benefited small business. According to an study by the Tax Policy Center, tax cuts created greater federal debt which means higher interest rates that might hurt growth, and high budget deficits can raise interest rates which hurt small businesses in the long term. The Bush tax cuts did not help small business, they helped corporations. A study by Congress's Joint Committee on Taxation found that about 3% of all households that report business income would be affected by expiration of bush tax cuts.
In the middle this discussion is also the idea that tax cuts can pay for themselves. However, the numbers just don't seem to bear this out. Tax receipts as a percentage of GDP decreased in 2002 and 2003 in response to the tax cuts of 2001. Despite a slight increase in tax receipts after the tax cuts of 2003, the tax cuts never came close to paying for themselves. In fact according to a report by the Center for Budge and Policy Priorities, the Bush era tax cuts are a significant cause of our current budget deficits. According to the Congressional Budget Office, nearly half the cost of all legislation enacted from 2001 to 2007 can be attributed to the tax cuts. However, it wasn't simply the Bush tax cuts alone. Nothing happens in a vacuum. When you consider huge tax cuts for the wealthiest Americans, and expansion of Medicare programs, and the cost of fighting an unnecessary war, the Bush era tax cuts where a simply part of a large public policy that increased economic inequality, increased governmental red ink, and contributed to the Great Recession.
Even former chairman of the Federal Reserve Alan Greenspan has stated that the tax cuts should be allowed to expire and that if they do not they will add to America's growing debt:
"I'm very much in favor of tax cuts but not with borrowed money and the problem that we have gotten into in recent years is spending programs with borrowed money, tax cuts with borrowed money. And at the end of the day that proves disastrous."
In the current political environment any policy that the Congressional Republicans can paint as a "tax hike" has a political benefit for them, even though this particular policy would only raise taxes 3% on the wealthiest on American households. In order to counter this argument Democrats must explain what should be done with this extra revenue besides the benefit of simply lowering the deficits. According to analysis from the Center for Budget and Policy Priorities, jobs tax credits would create 3 times as much economic growth as extending the Bush tax cuts, and each dollar spent on a jobs tax credit would create four to 6 times as many jobs as a dollar spent on extending the Bush tax cuts. Allowing the Bush tax cuts to expire could also help pay for state fiscal assistance and extensions of unemployment benefits. All of this could be achieved if Congress does what it does best: nothing.
