CBO: Obama's Tax Plan Could Be Worst of All

Extending most or all of the Bush tax cuts permanently will raise incomes and growth in the next few years, but seriously harm the economy by the end of the decade, according to devastating testimony by CBO chief Doug Elmendorf.

I say devastating because the White House and Senate are currently pushing only permanent solutions to the Bush tax cuts, which will expire at the end of the year. The White House and Senate Dems want to raise taxes on the top two percent and preserve them for everybody else. Senate Republicans want to extend the full Bush tax cuts, forever.

Washington's budget oracle made three big points in his economic outlook. First, the Bush tax cuts are, generally, a poor stimulus. Even extending them for two years will reduce output by 2020. Second, making all or most of the Bush tax cuts permanent, as both Democrats and Republicans want to do, will be much worse for the economy toward the end of this decade than extending the cuts for a few years only.

Third, and most surprising, Obama's plan to extend only 80 percent of the Bush tax cuts could be worse for the economy in 2020 than the Republican plan to extend 100 percent, even though the GOP's plan would saddle us with more debt.

Here are the most relevant graphs. First, a look at the positive effect of extending the Bush tax cuts in the next two years. For clarification, "full extension" means the entire Bush tax cuts. "Partial" extension is the president's plan to extend the cuts for everybody except those making more than $250K.

bush2.png
Second, a look at the negative effect of extending the Bush tax cuts by the end of the decade, all other things being equal, due to the government's debt burden crowding out private investment.

bush18.png

Focus on this graph, because it's big news. In the "strong labor response" scenario (the light blue bar), Obama's plan would hurt the economy more than the Republicans' plan in 2020, even though the GOP would add more debt and theoretically crowd out more private investment. How?

Elmendorf explains that it's a question of what calculator you use to determine 2020 income and growth. In the "textbook growth model," the GOP plan is worse because debt hurts more than lower tax rates help. But according to another model used by CBO, tax cuts for business owners could lead to higher employment that offsets the crowding out effect.

Three points to conclude. First, I'll bet Republicans try to use this testimony to show that Obama's plan not only raises taxes in the short run, but also hurts the economy in the long-run. Second, I'll bet Democrats use this testimony to ... well, no actually, Democrats are not going to want to talk much about this testimony because their Senate Finance Chair Max Baucus proposed the very "permanent partial extension" that CBO slammed.

Finally, and I'm sorry if this is getting boring for regular readers, but a permanent extension of the Bush tax cuts is crazy policy and impossible politics. It doesn't have the votes and it doesn't make sense. This was a long CBO testimony, but it can be summed up in three words: Keep it temporary.


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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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