Why America Should Stop Worrying and Love Taxmageddon

A decade ago, President Bush passed temporary tax cuts, betting that they would have to be made permanent to avoid an unpopular tax "increase." Everything is going according to schedule.

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In 2001, President George W. Bush used the budget surpluses of the late Clinton years -- and a slowing economy that would eliminate those surpluses -- to justify the Economic Growth and Tax Relief Reconciliation Act, which cut income tax rates and phased out the estate tax. Two years later, Tom DeLay used the impending Iraq War to rationalize the Jobs and Growth Tax Relief Reconciliation Act ("Nothing is more important in the face of a war than cutting taxes"), which slashed tax rates on capital gains and dividends.

The key word in the names of those bills is "Reconciliation." Both were passed through the reconciliation process to avoid the need for sixty votes in the Senate, and therefore both could not be permanent. Instead, all of the tax cuts were scheduled to "sunset" at different times, with many expiring at the end of 2010.

TEMPORARY TAX CUTS FOREVER!

That was clearly not the plan, however. President Bush and his advisers believed that the public would never give up a tax cut once they had it -- like an entitlement. The president campaigned throughout his tenure to make his signature tax cuts permanent. In 2004, when Congress began extending the tax cuts, Republican Congressman Jim McCrery said, "Anyone voting 'no' is voting for a tax increase for the American people, especially the middle class" (Iwan Morgan, The Age of Deficits, p. 229).

In 2005, the major tax cuts on investment income were extended by the Tax Increase Prevention and Reconciliation Act. The strategy paid off in 2010 when, despite Democratic control of the White House and both houses of Congress, all of the Bush tax cuts were extended for another two years.

That means that the tax cuts are facing expiration again this year. But the original Bush strategy has been wildly successful: Virtually everyone has internalized the idea that the Bush tax cuts are normal and letting them expire would be a huge tax increase. There has recently been an outbreak of articles discussing the economic consequences of this "fiscal cliff" or "Taxmageddon", including both the expiration of the tax cuts and the automatic sequesters required by the August 2011 debt ceiling agreement.

What is particularly clever about this strategy is that the people who would ordinarily oppose major tax cuts that overwhelmingly favor the rich -- liberals and other Democrats -- are the same people who worry that a tax increase would provide a negative shock to the economy, reducing growth and increasing unemployment. At the same time, the people who would ordinarily favor austerity -- conservatives and other Republicans -- like their tax cuts more than they care about reducing deficits.

So we've reached the point where Democrats have become enamored of the Bush tax cuts. Sure, President Obama wants to eliminate them for the rich, but that's a political point more than anything else. Preserving the tax cuts for the "middle class" (since when is a family making $241,000 middle class?) will cost almost as much as preserving them for everyone.

Presented by

James Kwak, an associate professor at the University of Connecticut School of Law, is co-author of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.
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James Kwak is an associate professor at the University of Connecticut School of Law and the co-author of 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. He blogs at The Baseline Scenario and tweets at @JamesYKwak.

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