Florida Democratic gubernatorial candidate Alex Sink made news Tuesday when she said that she favors extending all of what are known as the "Bush tax cuts," a major issue heading into the fall elections, as currently those tax cuts are set to expire at the end of this year.
Sink joins most of the Republican party establishment in that view, but not the Obama administration or many other Democrats, who want the rates to go up - or actually back to where they were during the Clinton administration - for those individuals making more than $200,000 a year, or couples making $250,000 (the marginal rate would go from 33% to 36% for those making up to #373,000 annually, and from 35% to 39.6% for those making more than $373,000).
The momentum seems to be leaning Sink's way. On Tuesday Peter Orszag, the recently departed director of the White House Office of Management and Budget, penned an op-ed in the New York Times (where he now will be a contributing editor) in which he also now is opposing his former boss, saying that the tax cuts for the richest 2% of the country should stay in affect until 2013.
Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets dont seem at the moment to view the budget deficit as a problem take a look at the remarkably low 10-year Treasury bond yield there is little reason not to extend the tax cuts temporarily.
Oszag is extremely aware that there will be pressure to make those cuts permanent, which he acknowledges would be irresponsible, especially since we know that they would cost nearly $700 billion annually.
The beauty of extending the tax cuts for only two years is that canceling them doesnt require an affirmative vote. It happens by default, so Congressional deadlock works in its favor. And it would essentially solve our medium-term deficit problem, reducing the deficit by $200 billion to $350 billion a year from 2015 to 2020.
Like all plans, this one isnt perfect. Some may complain that higher marginal tax rates, even if deferred until 2013, will cripple small businesses and economic activity. Its hard to believe, however, that effectively returning the tax code to its 1990s form would lead to economic catastrophe, especially when many leading Republican economists including Alan Greenspan and Martin Feldstein agree that we cant afford to continue the tax cuts forever. More troubling, middle-class and lower-class families would be saddled with higher taxes. Thats a legitimate concern, but also a largely unavoidable one if we are to tackle the medium-term fiscal problem.