The Case Against The Bush Tax Cuts

Newsweek makes it (via Ritholtz):

Ever since the Bush-era tax cuts of 2001 and 2003, the government has suffered from self-induced anorexia. Those oft-debated but never rescinded tax breaks have steadily drained the Treasury and added to its borrowings. Consider that in 2000, the total U.S. government debt (the net accumulation of its borrowings since the Revolutionary War) was $3.4 trillion. Today it is $11 trillion. This matters now because with the economy slowing again, the debt hugely constricts our options. The normal response to the bad jobs market would be increased deficit spending, but the government is already operating at a $1.5 trillion annual deficit (that’s equal to a tenth of the GDP). It is borrowing half of what it spends. That’s enough to have spooked S&P and reminded the stock market a bit too much of Europe.

You can understand the budget by thinking of two parallel lines, one representing spending, the other revenue. During most of the postwar period, the spending line was a shade higher (the government typically ran small deficits). In 2001, when the budget last was in balance, the government collected roughly 19 percent of the GDP in taxes; it spent slightly less. But since the Bush tax cuts went into effect, the lines have wildly diverged. Spending has soared to 25 percent of GDP. And, alarmingly, tax receipts have crashed to 15 percent of GDP, the lowest level since World War II. Everyone, Democrats included, recognizes that spending must come down. But the Republicans insist that taxes—any taxes—are off limits. Regrettably, Obama has mimicked this position with a populist twist (he opposes reversing the tax cuts except on the “rich,” whom he defines as people earning more than $250,000 a year). Though coated in progressivism, this extends the myth that people can get something for nothing.

It’s hard to overstate the extent to which these cuts have been, and continue to be, the worm in Uncle Sam’s apple. They have cost the U.S. $3 trillion; the stimulus, by contrast, cost $1 trillion. If the cuts are extended, over the next decade they will bleed the Treasury of $5.4 trillion more.

They make the case that Obama blew it by giving in to Republican demands to extend them for 2 years, which I agree with them on.  They should expire as part of a long-term deficit reduction deal, with the tax credits for the middle class phased out over two or three years.