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Analysts Now Expect All Bush Tax Cuts to Expire

photo: Steve Rhodes via Flickr

I’ve been banking on gridlock for a few months now, although I don’t necessarily agree with this article’s analysis as a reason.

Republican gains in U.S. elections next month boost the odds of Congress letting Bush-era tax cuts die at year end, a worst case scenario for Wall Street, and the opposite of the party’s stated goals.

Prospects had seemed assured for months that the current Democratic-controlled Congress would strike a deal to extend the rates before the end of 2010.

But now, with Republicans looking likely to take control of the House of Representatives and gain substantial influence in the Senate, tax policy watchers say neither side will be in a mood to bargain in the post-election “lame duck” session.

“I don’t think Democrats are motivated to extend them and Republicans won’t have the political base during a lame-duck to extend them all for as long as they like,” said Scott Hodge, president of the right-leaning Tax Foundation.

Whether the tax cuts get retroactively extended will depend on the margins Republicans manage to get in Congress. But even if they miraculously get control of the Senate, which isn’t looking likely at this point, they certainly won’t get close to having a 60-vote majority for extending all the tax cuts. The numbers just don’t add up. Republicans have already backtracked down to a temporary extension, bargaining to do the same kind of permanent-extension-by-inches that the Bush tax cuts themselves were supposed to engender.

Will this cause a shock in the economy, as every Wall Street analyst is claiming? Well, the income tax changes will be as minimal to the weekly paychecks of workers as the decreases in paychecks from the Making Work Pay tax credit. Everything else beyond income wouldn’t actually hit the economy for over a year. I don’t necessarily think the tax cuts should expire, but I’m not seeing a huge impact on January 1. And anyone being honest about it would agree. Some of the tax cuts at the low end would be hard to lose. But they are in the minority.

These tax rates have been in place for ten years. It’s been the worst time for job growth in postwar history. Let’s not pretend they’re so central to economic growth.

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David Dayen

David Dayen