No Economic Basis for Holding Middle-Class Tax Cuts Hostage to Tax Cuts for Wealthy

In this July 24, 2012, photo, Senate Minority Leader Mitch McConnell of Ky., gestures during a news conference on Capitol Hil
In this July 24, 2012, photo, Senate Minority Leader Mitch McConnell of Ky., gestures during a news conference on Capitol Hill in Washington, following a political strategy session, as from back left, Sen. John Barrasso, R-Wyo., Sen. John Cornyn, R-Texas, and Senate Minority Whip Jon Kyl of Ariz., listen. The Senate is bracing for a tax-cut showdown that is all about Democrats and Republicans showing voters their differences over taxing the well-off while accusing each other of threatening to shove the government over a fiscal cliff. Senators planned to vote Wednesday, July 25 on a $250 billion Democratic bill that would extend expiring tax cuts next year for all but the highest earners. Republicans were forcing Reid to corral 60 votes for the proposal, which he does not have. (AP Photo/J. Scott Applewhite)

Extending most expiring tax cuts other than President Bush's high-income tax cuts would boost gross domestic product (GDP) by a significant 1.3 percent next year, a new Congressional Budget Office (CBO) report finds, while extending the high-income tax cuts would do very little to support the recovery, boosting GDP by just 0.1 percent (see chart).

This timely report shows that holding a one-year extension of the Bush middle-class tax cuts hostage to an extension of tax cuts on incomes over $250,000 (for married couples filing jointly), as House Republicans have done, creates dangerous economic risks with little economic upside.

The Senate passed a bill earlier this year to extend the middle-income tax cuts -- as well as Alternative Minimum Tax relief and 2009 Recovery Act improvements to refundable credits for low- and moderate-income working families -- for 2013, when the economy is expected to remain weak.  But House Republicans have said that they won't extend those tax cuts unless Congress also extends the high-income tax cuts, which they say are critical to the recovery.  The CBO report makes clear that there is no economic justification for this approach.

In fact, it's just the opposite: extending the high-income tax cuts would mean little for growth in 2013, but failure to extend the middle-class tax cuts (or stimulus measures equally or better targeted to boosting demand) risks pushing the economy into recession.

Letting the high-income tax cuts expire would also shrink deficits by
over ten years.  This would be a major step towards stabilizing the debt and, consequently, would boost national saving, private investment, and long-term
.

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