On Tax Cuts, We're Damned If We Do And Damned If We Don't

It’s a pretty good bet that Congress and the Administration are going to try to come up with a solution on what to do with the expiring Bush tax cuts and the AMT (Alternative Minimum Tax) before the Thanksgiving holiday. Time is running out and hard choices have to be made.

If we “do nothing” and let the taxes sunset our budget deficit profile will improve significantly. On the flip side, if we raise taxes across the board on Jan 1 the economy will hit a wall. We are damned if we do and we are damned if we don’t.

The Administration has said it wants all tax increases to be pushed into the future for at least two years. Congress (I thought) was of a similar mind. There is now some doubt as to what they are collectively thinking. I believe that in the end, our legislators will roll over and give Obama what he wants; two more years to kick the can down the road.

The Congressional Budget Office looks at the impact of any legislation. Doug Elmendorf, the boss at the “non-partisan” CBO gave a speech on Friday on the topic of what to do with taxes. It’s not a pretty picture. Consider this slide that attempts to define the consequences on employment of a variety of actions the government could take.


Two observations:

A) Reducing taxes in 2011 has the least ‘bang for the buck’ in terms of creating long-term full employment. Given that this is the least effective alternative you have to wonder why it is being considered.

B) Except for reducing taxes none of the other options are politically feasible for the foreseeable future. We have congressional gridlock. There will no stimulus package in 2011 from our new legislators. So extending the Bush tax cuts is the only option. And that is why it will become law.

Of course nothing is free. If we don’t get our house in order and eliminate what was promised to be temporary cuts by Bush, the deficit will go up. By how much? According to the CBO it will double:


In summary, look forward to a patch on taxes that accomplishes very little in terms of future growth, one that has the least efficacy in addressing the underlying unemployment problem and the one that will insure that a fiscal explosion is not so far off in our future. I think Elmendorf sums it up pretty well:


Just a question: When do we address the question of the “Fundamental disconnect“? We haven’t done that at anytime in the past. We aren’t going to do it in the present. We will only do it in the future if there is a crisis that forces us. The conclusion is that another crisis is inevitable because what we are doing is unsustainable. I wonder if our congressional leaders read the stuff from the CBO. If they are, they are ignoring it.

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