An Out-of-the-Box Policy Playbook and the Bush Tax Cuts
Extending the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) – collectively known as the “Bush tax cuts” is not about counter-cyclical “stimulus.” The U.S. economy is growing and needs stronger pro-growth policies in order to continue to do so. A permanent and full extension in the context of responsible budget policy is shown to have better macroeconomic implications than a temporary and limited extension.
The Decision Economics SB model of the U.S. economy documents that ending the Bush tax cuts at this time would be a serious mistake, given the fragility of the economic uptrend currently in-place. Expiration of the income, capital gains, and dividend tax cuts and a return to pre-Bush levels would move fiscal policy much tighter and could restrain the economy enough to push it back into recession.
Our analysis “stacks the deck” by using a model that embodies large short-run multiplier responses to changes in government spending. Despite this, we demonstrate that extending the Bush tax cuts and reducing federal outlays delivers improved economic performance over the 2011-2015 period. (See Summary Table 1.) A corollary is that whatever improvement in the federal budget deficit that would be obtained from a full or partial sunset would be significantly offset by the tax revenues lost after feedback from a much weaker U.S. economy.
The federal budget is on a dangerous and unsustainable course. The problem stems from federal spending and fixing it should focus on increasing economic growth and reducing growth in outlays. Relying on near-term tax increases may even undercut efforts to rein in spending.
The distributional implications of these Acts have been poorly understood and discussions ignore channels by which tax burdens are shifted. In particular, the well-documented impacts of higher individual tax rates on entrepreneurial and small businesses will tend to shift the real burden of higher taxes toward workers and other suppliers.
The U.S. income tax system desperately needs reform. Viewing extensions of aspects of EGTRRA and JGTRRA from this perspective places a premium on extending low marginal tax rates, low and equal rates on the cash-flow returns to innovation and investment, and allowing the anti-growth, tax-based subsidies to consumption to sunset.
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