The Deficit vs. the Bush Tax Cuts

by Teresa Ghilarducci, SCEPA Director, and Lauren Schmitz, SCEPA Research Assistant

We don't blame anyone for being confused about budget talks in Washington. President Obama just agreed to extend the Bush tax cuts at the same time he said he was focused on shrinking the deficit. Now, letting tax revenue slip through our fingers by allowing tax breaks for the rich to expire could make sense - if the tax cuts got us out of the recession. But they don't.

Economists who were supposed to disagree about that stimulative effect of tax cuts didn't. They agreed.

At a Demos, EPI, and the Century Foundation conference in October, three economists - one from the right wing, Martin Feldstein (a dignified Harvard economist who has taught economic principles to thousands of students and chaired Ronald Reagan's Council of Economic Advisers); one from the left wing, blunt Paul Krugman (Nobel prize winning Princeton professor and New York Times writer); and one on the "up wing," Jan Hatzius from Goldman Sachs - agreed that tax breaks for people earning over $250,000 per year had little stimulative effect.

But if you want revenue, that's where the money is. If all Bush tax cuts were allowed to expire, it would cut the deficit by 54%, or $226 billion, in 2015.

If you tax only the rich, according to the New York Times analysis of the federal budget deficit (David Leonhardt's recent "Fix the Deficit Puzzle"), by allowing taxes to go up for households earning income above $250,000 a year, the take would be $54 billion in 2015 (or 13% of the projected $418 billion 2015 budget shortfall) or $115 billion in 2030 (or 9% of the projected $1,345 billion budget shortfall in 2030).

If the tax cuts for the bottom 98% of households - those making under $250,000 a year - were allowed to expire, the projected savings to the deficit would be $172 billion (or 41.15% of the total deficit) in 2015 and $252 billion (or 18.74% of the deficit) in 2030.

In sum, if all Bush tax cuts were allowed to expire it would cut the deficit by $226 billion in 2015 or by a whopping 54 % of the total projected deficit in 2015 (27% of the total deficit in 2030).

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