Pro & Con: Should the Bush tax cuts be extended?

The tax cuts included tax rate reductions, expansion of the child tax credit, credits for education and retirement savings and reduced taxes on capital income.

The revenue cost of the tax cuts is estimated to be $1.7 trillion over a 10-year period, while federal corporate and individual income tax revenues were approximately $11.8 trillion from 2001 to 2010.

The biggest benefits of the tax cuts arguably went to individuals in the top 20 percent of the income distribution — those with cash income greater than $110,000 (based on analysis by the Brookings-Urban Tax Policy Center).

Tax reductions allow individuals to consume and/or save more of their income. Both consumption and savings generate economic activity.

Consumption generates a larger positive impact on economic activity because of a larger multiplier effect — people spend money on a product, which generates income from the seller, who in turn buys other goods, and so on.

Savings expands the potential for investment and longer-term economic activity — it just takes a bit longer in most cases to impact economic activity.

People do spend out of tax cuts — but not typically dollar for dollar. A tax increase probably would lead to lower consumption by low- and middle-income individuals — something that might do further harm to the economy.

There is theory and evidence to suggest that higher-income individuals tend to save a larger percentage of their income (and consume a smaller portion) than lower-income individuals.

Therefore, increasing taxes on higher-income earners might not have much impact on their consumption — and in the short run, might not have a major impact on the economy.

Still, I argue that the tax cuts should be extended for the next two years.

There is mixed evidence of how much individuals react to tax changes, but we do know that taxpayers (especially wealthy ones) do not like uncertainty.

Given the fragile state of the economy, the uncertainty of tax rates may do more damage to a recovery than a limited increase in the federal deficit associated with extending the tax cuts for one or two years.

If taxpayers are uncertain about the tax cuts, they may save a larger share of their income to enable them to deal with the “unknown” tax changes. Businesses are less likely to develop and act on investment plans in the face of tax uncertainty.

The combined impacts could further sour the sentiment about the recovery and hinder economic growth even further.

Sally Wallace chairs the economics department at the Andrew Young School of Policy Studies at Georgia State University.

NO: Keep them for the middle class, but not for wealthiest 2 percent.

By Paul Krugman

Most discussion of the tax fight focuses either on the economics or on the politics — both of which suggest that Democrats should hang tough, for their own sakes as well as that of the country.

Back in 2001, the Bush administration bundled huge tax cuts for wealthy Americans with much smaller tax cuts for the middle class, then pretended that it was mainly offering tax breaks to ordinary families.

Meanwhile, it circumvented Senate rules intended to prevent irresponsible fiscal actions — rules that would have forced it to find spending cuts to offset its $1.3 trillion tax cut — by putting an expiration date of Dec. 31, 2010, on the whole bill.

And the witching hour is now upon us.

If Congress doesn’t act, the Bush tax cuts will turn into a pumpkin at the end of this year, with tax rates reverting to Clinton-era levels.

In response, President Barack Obama is proposing legislation that would keep tax rates essentially unchanged for 98 percent of Americans but allow rates on the richest 2 percent to rise.

But Republicans are threatening to block that legislation, effectively raising taxes on the middle class, unless they get tax breaks for their wealthy friends.

That’s an extraordinary step.

Almost everyone agrees that raising taxes on the middle class in the middle of an economic slump is a bad idea, unless the effects are offset by other job-creation programs — and Republicans are blocking those, too.

So the GOP is, in effect, threatening to plunge the U.S. economy back into recession unless Democrats pay up.

So should Democrats give in?

On the economics, the answer is a clear no.

Right now, fears about budget deficits are overblown — but that doesn’t mean that we should completely ignore deficit concerns.

And the GOP plan would add hugely to the deficit — about $700 billion during the next decade — while doing little to help the economy.

On any kind of cost-benefit analysis, this is an idea not worth considering.

And, by the way, a compromise solution — temporary tax breaks for the rich — is no better; it would cost less, but it also would do even less for the economy.

But what’s even more important is the principle of the thing.

Threats to punish innocent bystanders unless your political rivals give you what you want have no legitimate place in democratic politics.

Giving in to such threats would be an economic and political mistake, but more important, it would be morally wrong — and it would encourage more such threats in the future.

It’s time for Democrats to take a stand, and say no to GOP blackmail.

Paul Krugman is an economist and New York Times columnist.