Last week, Sen. Kent Conrad (D-ND), the chairman of the Senate Budget Committee, called for a temporary extension of all the Bush tax cuts, including those for the wealthiest two percent of Americans, which the Obama administration would like to see expire. Conrad even suggested waiving pay-go rules (which apply to those cuts for the richest two percent) in order to extend the cuts without paying for them.
Conrad quickly clarified that he wasn’t embracing the Republican approach, which is simply extending all of the tax cuts forever, calling that a “formula for the decline of the United States.” Today, Conrad appeared on CNBC to keep on trying to explain his position. “Can you clarify what’s more important to you: the revenue you would generate by letting them expuire on the wealthy or the damage that it would do to a nascent economic recovery if you raise taxes,” asked CNBC’s Joe Kernen. “What should we do?” Conrad replied that taxes need to eventually go up on the rich but “I don’t think this is the moment“:
We’ve got to be very careful with the timing of what we do. There’s no question in my mind that taxes have to go up on the wealthiest among us. The question is when. I don’t think this is the moment.
Conrad’s argument is understandable, and far better than the Republican position of passing deficit financed tax cuts in perpetuity, but it’s still misguided. While Conrad’s aim is to preserve the tax cuts in order to boost the economy, the Congressional Budget Office has found that, of the available tax and spending options, cutting income taxes in 2011 is the least stimulative of all. In fact, such a move generates just 10 to 40 cents in economic activity for every dollar spent. Cuts for high income households are even less effective, as “higher-income households…would probably save a larger fraction of their increase in after-tax income.”
Reducing income taxes also has, by far, the lowest effect on job creation. Other options like extending unemployment benefits, cutting payroll taxes, or investing in infrastructure all have considerably higher bang for the buck. Plus, as the Center on Budget and Policy Priorities pointed out, temporarily extending the tax cuts for the wealthy induces “a substantial risk that Congress would continue extending the tax cuts and even make them permanent, creating much larger deficits for years to come.
Indeed, as the Washington Post Editorial Board wrote, “a temporary extension of the upper-income tax cuts would be the worst of both worlds. In the short term, it would be ineffective as an economic stimulus. In the long term, it would add to the deficit.” A two year extension of the cuts for the rich would cost about $75 billion, with little in terms of economic activity to show for it.