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Ending Bush Tax Cuts Would Not Harm Economic Growth

The President met with the House Democratic caucus yesterday, a day after meeting with the Republican caucus. And he vowed not to increase the Bush tax cuts on the wealthy again. The fact that you have to put “again” in that sentence shows you just how much such a statement should be believed. If you asked the White House, I’m sure that they’d tell you that they were able to get a lot of stimulative measures in exchange for extending those tax cuts, which were needed to keep the recovery going. Given today’s horrific jobs report and the likelihood that the economy will STILL need help when the tax cuts come up again at the end of 2012, I don’t know why the same strategy wouldn’t be employed.

Furthermore, splitting the tax cuts above $250,000 of income from everything else just sets the whole thing up for failure. This means that you have to affirmatively pass something to extend the other tax cuts, and the tax cuts on the wealthy will unquestionably get attached to that. Then the President is in the position of allowing nothing to go through or the extension of the tax cuts he wants with the tax cuts he doesn’t. He said it last year when the tax deal was made – if the hostage will be harmed, you have to negotiate with the hostage-takers for their release. What has changed?

Except the hostage won’t be harmed. The economy would not be adversely affected by ending the Bush tax cuts and returning to the tax rates of the Clinton era. It just won’t. The economy faces major challenges, but among them, the possibility of Clinton-era tax rates factors very, very low.

In the five years after a $241 billion tax increase in 1993, which Republicans criticized as the largest ever, the U.S. economy created more than 15 million jobs and grew at an average annual rate of 3.8 percent.

In the five years after President George W. Bush’s 2001 tax cuts — which reduced marginal rates, raised the child tax credit, phased out the estate tax and gave “marriage penalty” relief to two-income households — the economy added about 6.5 million jobs and grew at an annual 2.7 percent pace.

“It’s not that simple,” said Phillip Swagel, who served Bush as assistant Treasury secretary for economic policy. “In the short run, yes, if you raise taxes, it’s generally harmful to growth. In the long run, it doesn’t have to be.”

Economic growth also is affected by elements other than taxes, including interest-rate policy, the price of oil and other commodities, and the business cycle itself.

“High GDP countries are high tax countries,” said Joel Slemrod, an economist at the University of Michigan’s Ross School of Business. “That doesn’t mean high taxes cause the high GDP.”

Slemrod was on Reagan’s Council of Economic Advisers. Swagel was in the Bush 43 Treasury Department. They really don’t seem to want to say what they’re saying. But the truth is that the country can not only survive, but thrive with Clinton-era tax rates. And given the alternatives of ending Medicare or crippling other safety-net programs, it’s extremely desirable. We have the lowest tax rates right now in 60 years, lower than under Reagan, as much as Republicans don’t want to admit it. Even ending the Bush tax cuts would leave behind a historically low tax rate.

(I fully recognize that, especially with yet another slowdown, what we need is some actual job growth, and stimulative measures to do that. I’m talking in terms of the conversation in Washington and the best course of action related to that, while continuing to try and change that course of action.)

Pledging to end a portion of the Bush tax cuts will only lead to extending the Bush tax cuts. Saying that anything that deviates from current CBO baselines will be vetoed – in other words, ending the Bush tax cuts – would actually retain some of the only leverage left.

But then, the President knows how to negotiate, he tells us. So you have to allow for the probability that he’s carrying out precisely what he wants to happen.

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David Dayen

David Dayen