Create Jobs: Extend Tax Cuts for the Middle Class, End Them for the Wealthy
November 8, 2010

Congress has one major piece of unfinished business that must be tackled before the year ends: taxes. During the Bush administration Congress passed two sets of enormous tax cuts that were skewed to benefit people with the highest incomes. To make the revenue losses appear more manageable, the cuts were phased in over a number of years and then scheduled to abruptly end on December 31, 2010. These gimmicks greatly reduced the 10-year cost of the tax cuts, making them more palatable to anyone concerned about the impact on the federal budget of trillions in lost revenue. But at the same time, supporters of the cuts assumed that Congress would make them permanent before they expired. The witching hour has now arrived.

These Bush tax cuts are a major factor driving up the federal government deficit. In 2009, the cuts were responsible for over one-quarter of the record $1.4 trillion shortfall in the federal budget.[i]  Some 13% of the deficit was due to the cost of the wars in Iraq and Afghanistan and the other 60% was caused by the economic downturn. Fewer people working means people pay less in income and sales taxes. And while our safety net is meager, it is still costly when millions of additional people are eligible for unemployment insurance, food stamps, and Medicaid. Bailing out the banks, AIG, and the auto industry was also expensive.

So what is a responsible member of Congress to do?

Many voters believe the nation’s priority must be putting people back to work. It is the only way we will ever get the deficit under control. People certainly need jobs and the paychecks that come with them. But the nation also needs the taxes that workers pay on their incomes, and the sales taxes they pay when they spend it. When more people work, fewer rely on safety net programs and government costs fall. A robust economy also means businesses thrive and pay taxes. So to boost tax revenues and cut government costs, we must get people working again.

President Obama is proposing to extend the Bush tax cuts for lower- and middle-income tax payers. But he wants to end the cuts for married tax payers with incomes over $250,000 and singles with income over $200,000. This would affect just 2%[ii] of tax payers while bringing in $40 billion in 2011.[iii] But some members of Congress prefer to extend all the tax cuts including those for the highest earners.

What is the best use of $40 billion? Should the skewed Bush tax cuts that bestowed the greatest benefits on our wealthiest citizens be extended, allowing them to keep the $40 billion? Or should this money be used for another purpose?  Of eleven job-creation options examined by the nonpartisan Congressional Budget Office, extending the tax cuts for high-income tax payers was the least effective. Providing aid to state governments so they could minimize layoffs would create two to three times as many jobs as extending the tax cuts for the wealthy, and providing a job-creation tax cut for businesses would generate four to six times a many jobs.[iv]

Congress should have no doubt about the best course of action. End the tax cuts for the 2% of our wealthiest tax payers while extending them for everyone else. Once the current unemployment crisis is behind us, the additional revenue can be devoted to reducing the deficit.     

In recent years, the rich have gotten richer and everyone else has gotten the left-overs. Ending the Bush tax cuts for the highest-income tax payers would slightly reduce this disparity. It could also create jobs in the short run, and reduce the deficit in the longer term. Congress should have no doubt about the best decision to make.