The White House and Congressional Republicans are close to a deal that would extend the entire Bush tax cuts, including for the contentious top two percent, for two or three years. In return, crestfallen Democrats would get a significant extension of unemployment benefits.
Liberals have greeted the news with much gnashing of teeth. Paul Krugman called for the president to tear up the deal and push for his own tax increase -- even if it means the law's expiration, higher taxes for all Americans next year, and no new unemployment benefits. It goes without saying that this strategy would have the small benefit of political purity and the large drawback of clobbering middle-class families with a $1,000 tax bump and snatching jobless benefits from millions.
It's hard to talk about the Bush tax cuts without scrambling politics and policy. Politically, the Bush tax cuts have been an unmitigated disaster for Democrats, exposing the Senate and House caucuses as divided, desperate, and disorganized. But as a matter of policy, this plan -- which combines short-term tax cuts with renewed support for low income families to sustain today's large government deficits while states and the labor market wobble -- is close to what center-left economists want from government policy during a downturn.
That doesn't make it perfect policy. Tax cuts for rich Americans have pretty low bang for the buck, according to budget experts. The $60 billion we're letting the top two percent keep every year under the Bush tax cuts could pay for universal preschool for 3- and 4-year-olds. But this plan has two cardinal virtues: It's temporary and it's stimulus.
Temporary is key, because making any significant part of the Bush tax cuts permanent is a budget buster. Extended for a full decade, the Bush tax cuts would keep effective tax rates on all Americans at 50-year lows while government spending rose to historic highs. All told, it would deprive Treasury of $4 trillion in the next ten years and potentially destroy our credit with international investors. That's why the only reasonable solution for Democrats is to extend some part of the Bush tax cuts for a few years, fight like hell for reelection, and finally replace the Bush tax cuts with a new tax law that raises more money.
Stimulus is key because the economy is still weak. Consumer demand is only fledgling, the housing market is still diseased, and Europe is imploding. Letting the entire Bush tax law expire on January 1 would swipe $1,000 from the average American. What's more, killing a deal that would extend unemployment benefits for millions of Americans would both punish the families hurting the most and kill what budget experts consider the most effective type of stimulus: cash handed to the most cash-needy.
For the sake of tomorrow, we cannot make the Bush tax cuts permanent. For the sake of today, we must extend low tax rates to middle-class Americans and fight to provide stimulus to the neediest Americans. For those reasons, this tax cut deal -- painful and embarrassing as it might be to Democrats and progressives -- is not cause for despair.