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Extending all Bush tax cuts is the wrong way to go

The substantial revenue loss from extending all the tax cuts would make it nearly impossible to reduce the federal deficit in a responsible manner.

Extending the expiring 2001 and 2003 federal tax cuts would give the largest tax benefits to the highest-income Minnesotans and is a relatively ineffective way to spur economic growth, a new report from Citizens for Tax Justice (CTJ) finds.

An intense tax debate is under way because federal tax cuts passed in 2001, 2003 and 2009 all expire at the end of 2012. Congressional Republicans have argued for extending all of the 2001 and 2003 tax cuts (often collectively called the “Bush tax cuts”), including income tax cuts on earnings, capital gains and stock dividends, and cuts in the estate tax. The report assumes they would allow the 2009 tax cuts that primarily benefit low-income working families to expire. These include expanding the Earned Income Tax Credit for married couples and larger families and making the Child Tax Credit available to more low-income workers.

Calculations by the Institute for Tax and Economic Policy (ITEP) demonstrate that the tax cuts resulting from such an approach would be extremely unbalanced. For example:

▪    The one percent of Minnesotans with the highest incomes – those with average incomes over $1.3 million – would see an average tax cut of $71,010 in 2013, compared to allowing the tax cuts to expire.

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▪    The 20 percent of Minnesotans with the lowest incomes would see a $120 tax cut.

▪    Middle-income Minnesotans would receive a $900 tax cut.

A different set of policy choices brings a more balanced outcome. The wealthiest Minnesotans would receive $20,150 in tax cuts in 2013 under President Obama’s proposal, and low- and middle-income Minnesotans would receive $200 and $930 in tax cuts respectively. That’s because President Obama’s approach extends many but not all of the Bush tax cuts and maintains the 2009 improvements for low-income working families.

Proponents argue that extending the Bush tax cuts is critical for boosting economic growth. But there are better options for reaching that goal. Economist Mark Zandi, cited in the CTJ paper, estimates that each $1 spent on making the Bush tax cuts permanent would generate 35 cents of economic output in the next year. More cost-effective measures in stimulating economic growth include extending Unemployment Insurance for Americans looking for work ($1.55 in economic output for each $1 spent), temporarily increasing Food Stamps ($1.71 in economic output for each $1 spent), and increased spending on infrastructure ($1.44 in economic output for each $1 spent).

The tax debate is not happening in a vacuum. Federal policymakers last year committed themselves to a path of reducing the federal deficit, including making over $1 trillion in cuts in spending over the next decade.

The Bush tax cuts were a major contributor to growing deficits, and revenues must be part of a balanced approach to putting the federal budget on a more sustainable path. Allowing all of the Bush tax cuts to expire would be fiscally irresponsible; that approach would cost $1 trillion more in lost revenues over a ten-year period, including interest payments, than what President Obama has proposed, according to CTJ.

The substantial revenue loss from extending all the tax cuts would make it nearly impossible to reduce the federal deficit in a responsible manner, and make it more likely policymakers would turn to even deeper cuts in health care, education and other services. Minnesota would almost certainly do worse under such a scenario, as substantial cuts in federal funding to the states would result.

This post was written by Nan Madden and originally published on Minnesota Budget Bites.

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