The tax debate we are NOT having

The tax cuts that George W. Bush rushed through Congress in 2001 were unwise. As we budget analysts pointed out at the time, America could not afford them because our existing tax structure made insufficient provision for the rising costs of Medicare and Medicaid and, to a lesser extent, of Social Security. As Bush's legislative team maneuvered the cuts through the Congress, Federal Reserve Chairman Alan Greenspan and Bush Treasury Secretary Paul O'Neill, both Republicans, warned in meetings that permanent tax cuts were a mistake. Then they retreated to the Treasury Building to tell each other that America would come to regret this.

Senate procedures made it impossible to pass more than a 10-year tax cut in 2001 without concessions to conservative Democrats that Bush did not wish to make. Thus at the end of this year the tax rates revert to their Clinton-era levels. Those levels, which suited us fine back then and were consistent with rapid and high-productivity investment-led economic growth, brought us many steps closer to achieving a stable, long-term foundation for our government's finances. Moreover, they quieted an important source of uncertainty that hobbles business; for when government spends more now than it taxes now, somebody ultimately is going to pay the taxes to balance the government's books—they just do not know who they are yet.

We ultimately need to bend the federal spending curve.

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Consequently, right now we should be having a policy debate over what to do in the wake of the expiration of the imprudent and damaging Bush-era tax cuts. Should we enact another set of permanent or long-term tax cuts? The answer is no—because our existing tax structure makes insufficient provision for the rising costs of Medicare, Medicaid, national defense, and Social Security. Thus we should be enacting policies that bring our long-term spending commitments and our long-term revenue plans back toward balance—rather than repeating the feckless misgovernment of the Bush years and enacting policies that drive spending and revenue further apart.

We should also be having a policy debate about what form our tax system should take. We should consider relieving the tax burden on factors of production—the raw materials that go into producing goods and services—and shifting it instead to purchases by way of a federal value added tax. (Our worries about insufficient national savings suggest we should tax thrift lightly and consumption heavily.) The fact that income and wealth inequality have exploded over the past generation argues for a more progressive tax system that increases the share of taxes borne by the rich. Today’s rich are, after all, much, much richer and hence much, much more able to afford taxes than the rich of a generation ago, while the differences between the middle class of today and of the previous generation are quite small.

And right now we should be having another policy debate as well. Relative to normal times, at least 10 percent more of the American labor force is underemployed or unemployed. Would a timely, targeted, and temporary tax cut—aimed at those households most likely to spend it—be a useful tool to boost the economy and get that 10 percent figure down to a more bearable number? The answer is yes.

Those are the three political debates that we ought to be having.

But we are not going to have those debates.

Instead, it looks as though the Obama administration is about to propose what it—wrongly—calls an extension of the Bush-era middle-class tax cuts. Never mind that those cuts will give my household about 10 times as big a reduction in tax payments as they give to a genuinely middle-class household making $50,000 a year. What the Obama administration opposes is to extend the reduction in tax rates on that extra share of income that my wife and I (and others like us) receive beyond $250,000 a year. In other words, the administration wants to give us a break only 10 times larger than the one received by a genuine middle class family—not 20 or 30 times as big.

Republicans will denounce this Obama plan as class war against America's most productive citizens. Democrats will denounce Republicans as tools of the greedy. Republicans will use procedural obstacles to try to block any extension—saying that the Democrats don't really want to extend any of the tax provisions and are just pretending. Democrats will say that Republicans don't care about real Americans but only about their super-wealthy base.

In this fight, you will find me on the Democratic side—because a permanent extension of most of the tax cuts is bad but a permanent extension of all of the tax cuts, including the high-bracket tax cuts, is worse. The Democrats' proposal offers a low bang-for-buck as short-term therapy for unemployment and underemployment. But it is still better than a poke in the eye with a sharp macroeconomic stick that allowing all income tax rates to immediately and completely revert to their Year 2000 levels would be.

But this is not going to be good government. And it is not going to be edifying.

What we ought to be doing is: a) letting the Bush-era tax cuts expire, b) implementing a new set of temporary recession-fighting tax cuts targeted at those most likely to spend what tax relief they get, and 3) tying longer-term tax reductions to successful progress on bending the curve of long-run spending growth.

That is what a great nation with a sober and reality-based politics would do.