Tax cut season in Washington

The tax cuts signed into law by President George W. Bushare set to expire at the end of December, and the resulting increase in tax bills could be large enough to stall the already struggling economy. On Monday, President Obama called on Congress to renew the reductions for one year, but just for low- and middle-income Americans, not for individuals with taxable incomes above $200,000 or couples with incomes above $250,000. Given that there’s virtually no chance of Congress acting on taxes before the November elections, Obama’s announcement was a political gesture aimed at focusing the debate on the rates paid by the wealthy. But at a time when the federal government is practically drowning in red ink, that’s a debate worth having.

The looming end of the Bush tax cuts coincides with the expiration of other temporary tax breaks and the imposition of broad new spending cuts called for by last year’s deal to raise the debt ceiling. This sort of belt-tightening would dramatically reduce the deficit, the Congressional Budget Office has predicted, but it would also throw the economy into a brief recession. That’s the last thing lawmakers should allow to happen, yet given the stalemate between Republicans and Democrats over budget issues, it’s a real possibility that Washington will go over the so-called fiscal cliff.

Republicans have criticized Obama for not leading, but their real complaint is that he hasn’t budged from his demand that the Bush-era breaks be rescinded for high-income Americans. They argue that it would be folly to raise taxes now, particularly on “job creators” — the entrepreneurs who pay taxes on their business profits through their personal returns. But renewing all of the Bush tax cuts would cost close to $3 trillion over 10 years, making it that much harder to close the yawning federal budget gap. Why do Republicans care so much about the deficit when social programs are up for debate, but ignore it when the issue is tax cuts for those at the top of the economic ladder?

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The problem for Obama is that growing the economy is key to reducing the deficit, and a tax increase can impede that growth. But another impediment is uncertainty about tax and spending policy, which is what the paralysis in Washington has produced. Ideally, lawmakers would simplify the tax code by reducing the number of deductions and loopholes, enabling Washington to raise revenue without having to increase marginal rates. Sadly, even though Obama and presumptive GOP presidential nominee Mitt Romney have both called for such an overhaul, it would be a miracle if lawmakers delivered it before the election.

In the meantime, Obama’s proposal to temporarily extend some of the Bush tax cuts may not be the ideal policy, but it’s the best option on the table. Those cuts contributed to six years of only sporadic growth, as well as helping to transform the budget surpluses of the late 1990s into the deficits of the 2000s. So why do Republicans remain wedded to them?