Is a Tax Reprieve for the Rich the Closest We’ll Come to Stimulus?

Is a Tax Reprieve for the Rich the Closest We’ll Come to Stimulus?

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The Senate Finance Committee  is holding a hearing today on what to do about the Bush tax cuts, all of which will abruptly expire on January 1 if Congress doesn’t act.

The hearing itself will be routine, but it raises this question: could an extension of tax cuts for the rich be the only “stimulus” bill that Republicans and Democrats can agree to this year?

So far, Senate Republicans have managed to block a $35 billion  extension of unemployment benefits; $24 billion to shore up state Medicaid programs; $23 billion (later whittled down to $10 billion or less) to prevent 100,000 teacher layoffs, and a number of other things. 

The fight is still underway, but 2 million unemployed people have run out of benefits since June 1 and the economic recovery is looking weaker by the day.

Now we come to the Bush tax cuts -- lower individual tax rates, lower rates on dividends and capital  gains, elimination of the estate tax and a lot more.  Extending all of them would cost about $3.2 trillion over the next ten years – all of that paid with borrowed money.

Obama and the Democrats want to make the tax cuts permanent for families with incomes below about $200,000, but let rates jump back up for the top 2 percent of earners on Jan. 1.  Republicans want to keep rates low for everybody, including those at the top.

But given how weak the economy still is, Democrats are getting nervous. Many would undoubtedly like to postpone the tax hikes for another year, at least until the elections are over.  It’s the one thing that Republicans might agree with them on.

Unfortunately, this would be a horrible substitute for either stimulating job creation or helping people weather unemployment.    

The economic problem: the stimulus impact would be zero, but the deficit would be about $55 billion bigger.  There wouldn’t be any stimulus because not raising taxes isn’t the same thing as cutting taxes.   People wouldn’t have any more money in 2011 than they  did in 2010, so they wouldn’t spend more.  Meanwhile, the government would be doing nothing to provide relief to the millions who have been jobless for nine months and longer.  But the cost in lost revenues for one year alone would be about $55 billion.

The political problem:  a tax reprieve for the top 2 percent of income-earners would be very ugly if Congress simultaneously refused to help people decimated by the downturn.

If the tax cuts were extended for everyone, people in the bottom fifth of earnings would save an average of $45, according to the Tax Policy Center.  People in the top fifth would save an average of $7,820, while those in the top 1 percent would save an average of $62,497.