By Rachel Brody |
As the U.S. economy continues to putter slowly along, policy makers need to provide ways to boost aggregate spending and accelerate the economic expansion back to full employment. At the same time, the looming budget shortfalls in the medium- and longer-term will require significant changes to both spending and tax programs.
The tax plan the Senate passed last week bows in the direction of short-term stimulus and long-term fiscal adjustment, but doesn't do nearly enough of either, and perhaps worse—it provides the short-term boost in a way that will make long-term deficit reduction more difficult.
It doesn't do enough in the short run because taxes would still rise in the short-term (because it would not extend the current payroll tax cut and it would let the top two income tax rates return to 1990 levels), but the economy needs a boost right now, not a mild sedative. The Senate tax plan harms the long-term situation by extending most of the Bush tax cuts, which will make getting rid of those tax cuts and enacting real tax and budget reform all the harder in the future.
Congress should instead address short-term economic weakness with a significant, temporary stimulus right now—including payroll tax reductions, aid to the states, and infrastructure investment—and address the long-term fiscal situation by letting the Bush tax cuts expire. The stimulus would help the economy grow now.
And Congress should let the Bush tax cuts expire. This would make it easier to negotiate a serious budget deal and is the only way to get a deficit reduction package that is reasonably balanced between spending cuts and revenue increases. The reason why is that about 90 percent of Republicans in Congress have signed the "No New Taxes" pledge. The signers pledge to oppose any net tax increases, under any circumstances. Therefore, letting the Bush tax cuts expire will make it easier to reach a balanced deficit reduction package—since it would involve a deal that would be cutting taxes (from a higher level than now) rather than raising taxes from their current level.
The debate over how to fix the economy is—or at least should be—much broader than the tug-of-war about how much of the Bush tax cuts to extend. Policy makers have options at their disposal that they need to exploit, for a better today and tomorrow.
About William Gale Senior Fellow at the Brookings Institution
Dean Baker Co-Director of the Center for Economic and Policy Research