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3 Reasons to Let the Bush Tax Cuts Expire

Alicia Munnell, the director of the Center for Retirement Research at Boston College, is a weekly contributor to “Encore.”

President Obama should let the Bush 2001/2003 tax cuts expire at the end of 2012, not only for the wealthiest Americans but also for couples with incomes under $250,000 and for individuals with incomes under $200,000.  To accomplish this goal he needs to do nothing.  Gridlock and inertia are on his side.

Letting the tax cuts expire would accomplish three important goals.  First, it would provide funds in the short run to help the unemployed. Yes, we have all lost money in our 401(k)s and maybe had our salaries frozen, but the unemployed have borne the brunt of this recession.  Second, letting the tax cuts expire would cut the projected 2020 budget deficit by more than one third.  Such a step would restore some confidence that the federal government knew how to manage its finances.  Third, it would reduce the divisive rhetoric of pitting the wealthy against the middle class.

The Great Recession has driven the U.S. unemployment rate from 5 percent to over 9 percent, making joblessness the single biggest and most urgent domestic issue.  Six million Americans have been unemployed for more than six months.  Unemployment benefits provide some support, but most people simply do not have the resources to weather such an extended period without work.  The resulting psychological and financial pressure destroys marriages, disrupts families, and devastates neighborhoods.  And prolonged unemployment can result in individuals being permanently disengaged from the labor force, a tragic outcome for the individual and the nation.

This country needs an immediate solution to unemployment.  It cannot wait until the economy slowly makes it way to health.  A portion of the revenue saved by ending the Bush tax cuts should be used to create jobs for the nation’s unemployed and provide funding for state and local governments to prevent more layoffs.  The jobs could be created through subsidies to private sector employers or through direct support for persons to help teachers in the classroom, provide care for the nation’s elderly, clean up our parks and subways, or repair our aging infrastructure.  It is simply unfair for nine percent of households to bear most of the burden of the fallout from the financial crisis. And direct job creation – not lower taxes – will give the greatest momentum to the recovery.

Allowing the Bush tax cuts to expire would also represent a solid down payment on our fiscal bill.  According to economists Alan Auerbach and Bill Gale, the deficit may well exceed 6 percent of GDP by 2020, with the debt-GDP ratio reaching 90 percent.  Not extending the Bush tax cuts could reduce the 2020 deficit by one-third, even if some of the savings were directed towards the unemployed over the next few years.  We never needed and could never afford the cuts in the first place.  In fact, the reason they were originally slated to expire was a budget gimmick to disguise their long-run costs.  If we don’t get rid of the tax cuts now, they will do more damage to our nation’s fiscal future.

Finally, allowing the Bush tax cuts to expire for everyone will restore a sense of national unity.  Dividing the nation’s households into the “wealthy” and “the middle class” creates one more fissure in a country that is already fractured along so many dimensions.  The progressivity of the personal income tax will ensure that those with higher incomes pay more — $803 for a household with a cash income of $40,000-$50,000; $1,677 for a household with $100,000-$200,000; and $18,529 for a household with income between $500,000-$1,000,000.   And remember that all of us paying those higher taxes have jobs.


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    • So we need to lose Jobs to save more? this is stupid, Tax cuts have given Revenue Increases to all sectors during Regan and bush, the Libs want Taxes to go up so they can spend more and have more Stimulus.

    • I agree with in the heartland but tax policy discussions are relevant to retirees as they are on fixed incomes, at least most today. Correct me if I’m wrong but I believe that I read the Depression Civilian Conservation Corps ( government job creation ) and other programs from that era prolonged the economic stagnation for an extra period of time of about 14 years. On top of that I watched a news clip from this week showing massive infrastructure jobs here in the US have gone to Chinese compnies and Chinese workers brought here to do them !! They cited a bridge job in California among others. Sorry no easy fix without pain somewhere. I find it hard to believe that merely letting the Bush Tax cuts disappear would heal a rift between the rich most of whom have worked their butts off to be rich and the poor who for whatever reason can’t get ahead. Liberty Equality and Fraternity sure sound good but the devil is in the details and human nature. The article implies that while it is good to help the unemployed the problems of job creation that support families will not be fixed by dropping taxes but it glosses over the problem of doing that. I think everyone agrees that people having jobs that are able to support families and pay taxes would “fix” our dilemma. The real debate is how to do that. A further failure of the article is that it presupposes no new government spending prior to 2020. Anyone believe that when the cry is for the government to create jobs? Anyone know who pays the government to pay for those jobs not to mention other new spending? Remember the rich will have already upped their part of the bargain as proposed by this article. Sorry to mention this as well but in the early colonial years and after, if one wanted to get ahead there was the individual effort to make the American Dream. Today’s work ethic has eroded and needs to be fixed by restoring honesty and respect. As I said in the other blog, my wife and I have worked most of our lives putting in 55-70 hours a week so we know it can be done.

    • I concur with heartland. Also, why is this post on tax policy in a retirement blog?

      Appreciate the blog in all other ways! Thanks.

    • Wow, another liberal with lofty goals of redistribution, and “allowing” government to create jobs. Hmm, that hasn’t worked for three yeras now has it? Get out from behind your professorial podium and join the rest of us in the real world: Bearing the brunt of crushing government regulation and regressive taxes.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.