Skip to main content
Part of complete coverage on
 

End the Bush tax cuts and start over

By William Gale, Special to CNN
July 12, 2012 -- Updated 1203 GMT (2003 HKT)
William Gale says President Obama's tax cut plan has good features but could be made better.
William Gale says President Obama's tax cut plan has good features but could be made better.
STORY HIGHLIGHTS
  • William Gale says some tax cuts makes sense in light of economic weakness
  • He says limiting tax cuts to lower levels of income also is appropriate
  • Gale says it's not true that higher taxes for higher incomes would hurt small business
  • Gale: A better framework would scrap all of the Bush tax cuts and impose different cuts

Editor's note: William Gale is a senior fellow at the Brookings Institution and co-director of the Urban-Brookings Tax Policy Center.

Washington (CNN) -- Earlier this week, President Barack Obama proposed to extend the Bush-era income tax cuts, which expire at the end of this year, for one year for people with income below $250,000. People with higher income would continue to receive all of the benefits of lower taxes on their first $250,000 of income, but the tax rate they face on income above that amount would rise.

One might wonder why we need more tax cuts, given that the Congressional Budget Office just released a study showing that tax burdens as a share of income for almost all households were the lowest in 2009 that they have been in decades and given that we face a long-term deficit problem that will require more revenues over time.

The answer, of course, is that taxes are slated to rise at the end of this year, an increase that if allowed in full, along with scheduled spending cuts that came out of the debt limit budget deal in 2011, would hurt an already weakly recovering economy in the short-term and possibly push it back into recession, if not counteracted. The president's proposal would substantially reduce the extent to which taxes are slated to rise.

William Gale
William Gale

The president's unwillingness to keep Bush-era tax rates for households with the highest income has been criticized on grounds that it will hurt job-creation efforts and in particular small businesses. These criticisms can be overstated, however.

First, in our current economy, with significant number of unemployed workers, job creation will depend much more on creating an economic stimulus -- that is, by cutting tax levels and by boosting spending by federal, state and local governments and by the private sector -- than a slightly lower marginal tax rate.

Tax cuts, outsourcing on campaign trail
Obama defends tax plan
Doggett: Tax breaks don't make jobs
GOP: Tax increases are economic poison

Second, the net tax rate businesses actually pay on new investment and new hires, not the tax rate listed in the tax law, is what should drive business choices. The "effective tax rate" takes into account that small businesses can generally write off all of their investment as a deduction in the year the investment is made. This is sometimes called section 179 expensing.

This provision reduces the effective tax rate on new investment financed by the business owner to zero. Yes, zero, because any tax on future investment returns will simply pay the government back for the cost of the deduction. This is true no matter what the tax bracket is for the taxpayer.

Indeed, if they can finance the investment with tax deductible debt payments, small businesses will face an effective tax rate that is actually negative.

Likewise, the calculus of hiring a new worker should take into account the fact that wage payments are deductible for businesses. Hence, if the law imposes a higher statutory tax rate on higher incomes, while it will raise the tax that has to be paid on the proceeds from new investment and new hiring, it also will raise the value of the deductions that most small businesses can take from the new investment and new hiring, and in a way that exactly balances out.

Third, much of the income for small businesses comes in the form of capital gains, which would continue to face a much lower rate than ordinary income.

Fourth, the vast majority, 97%, of people who receive most of their income from business sources are not in the top two tax brackets. Small businesses are essentially used sometimes as a "poster child" by those who wish to avoid higher taxes on other income at high income levels.

Still, while the president's proposal recognizes the need to avoid running straight off the fiscal cliff next January, it could be improved.

First, it does not do enough to promote economic growth in the near term. The economy would still be facing tax increases (due to the end of the temporary payroll tax cut) and government spending cuts (due to the budget deal).

In an economy that is struggling to reduce unemployment, these restrictive measures will not help. European countries have seen the failure of austerity policies and the effects would have the same impact here too.

Rather, the economy needs a bigger stimulus, with a bigger bang for the buck. This could take the form of payroll tax cuts, infrastructure investments and federal aid to states and localities, which have had to cut back on jobs and education and other forms of spending.

Second, the president's proposal prolongs highly partisan debates about the Bush tax cuts and which should be extended and for how long.

A better way to stimulate the economy and move the broader debate forward would be to let all of the Bush tax cuts expire as scheduled and be considered as part of a broader tax reform and medium-term deficit reduction effort, and institute instead an explicitly temporary cut, again a payroll tax cut comes to mind.

Regardless of the fate of the president's proposal, policy makers need to address the weakly recovering economy and build toward a sustainable long-term tax and fiscal solution.

Follow @CNNOpinion on Twitter

Join us at Facebook/CNNOpinion

The opinions expressed in this commentary are solely those of William Gale.

ADVERTISEMENT
Part of complete coverage on
April 24, 2014 -- Updated 1918 GMT (0318 HKT)
Frida Ghitis says as violence claims three U.S. doctors, the temptation is to despair, but aid to Afghanistan has made it a much better place
April 24, 2014 -- Updated 1833 GMT (0233 HKT)
Ruben Navarrette says in California, Asian-Americans are against the use of racial criteria in public colleges.
April 24, 2014 -- Updated 1844 GMT (0244 HKT)
Heidi Schlumpf says if the Pope did tell an Argentinian woman married to a divorced man that she could take Communion, it may signify a softening of church rules on the divorced and sacraments
April 24, 2014 -- Updated 1629 GMT (0029 HKT)
Norcross, Georgia, Chief of Police Warren Summers says the new law that allows guns in bars, churches and schools will have unintended dangerous consequences.
April 24, 2014 -- Updated 1742 GMT (0142 HKT)
Mel Robbins says social media is often ruled by haters, and people can be brutally honest.
April 24, 2014 -- Updated 1644 GMT (0044 HKT)
Mike Downey says the golf purists can take a hike; the game needs radical changes to win back fans and players.
April 23, 2014 -- Updated 1641 GMT (0041 HKT)
Robert Hickey says most new housing development is high-end, catering to high-earners.
April 23, 2014 -- Updated 1317 GMT (2117 HKT)
Alexander Motyl says as Russian President Putin snarled at Ukraine, his foreign minister was signing a conciliatory accord with the West. Whatever the game, the accord is a major stand down by Russia
April 23, 2014 -- Updated 1229 GMT (2029 HKT)
Les Abend says at every turn, the stowaway teen defied the odds of discovery and survival. What pilot would have thought to look for a person in the wheel well?
April 24, 2014 -- Updated 1104 GMT (1904 HKT)
Q & A with artist Rachel Sussman on her new book of photographs, "The Oldest Living Things in the World."
April 22, 2014 -- Updated 1958 GMT (0358 HKT)
Martin Blaser says the overuse of antibiotics threatens to deplete our bodies of "good" microbes, leaving us vulnerable to an unstoppable plague--an "antibiotic winter"
April 22, 2014 -- Updated 1737 GMT (0137 HKT)
John Sutter asks: Is it possible to eat meat in modern-day America and consider yourself an environmentalist without being a hypocrite?
April 22, 2014 -- Updated 1538 GMT (2338 HKT)
Sally Kohn notes that Meb Keflezighi rightly was called an American after he won the Boston Marathon, but his status in the U.S. once was questioned
April 22, 2014 -- Updated 1256 GMT (2056 HKT)
Denis Hayes and Scott Denman say on this Earth Day, the dawn of the Solar Age is already upon us and the Atomic Age of nuclear power is in decline
April 21, 2014 -- Updated 2036 GMT (0436 HKT)
Retired Coast Guard officer James Loy says a ship captain bears huge responsibility.
April 21, 2014 -- Updated 1708 GMT (0108 HKT)
Peter Bergen says the latest strikes are part of an aggressive U.S. effort to target militants, including a bomb maker
April 21, 2014 -- Updated 1345 GMT (2145 HKT)
Cynthia Lummis and Peter Welch say 16 agencies carry out national intelligence, and their budgets are top secret. We need to know how they are spending our money.
April 21, 2014 -- Updated 1235 GMT (2035 HKT)
Julian Zelizer says President Obama knows more than anyone that he has much at stake in the midterm elections.
April 22, 2014 -- Updated 1255 GMT (2055 HKT)
Eric Sanderson says if you really want to strike a blow for the environment--and your health--this Earth Day, work to get cars out of cities and create transportation alternatives
April 21, 2014 -- Updated 1408 GMT (2208 HKT)
Bruce Barcott looks at the dramatic differences in marijuana laws in Colorado and Louisiana
April 18, 2014 -- Updated 2047 GMT (0447 HKT)
Jim Bell says NASA's latest discovery supports the notion that habitable worlds are probably common in the galaxy.
April 18, 2014 -- Updated 1817 GMT (0217 HKT)
Jay Parini says even the Gospels skip the actual Resurrection and are sketchy on the appearances that followed.
April 18, 2014 -- Updated 1752 GMT (0152 HKT)
Graham Allison says if an unchecked and emboldened Russia foments conflict in a nation like Latvia, a NATO member, the West would have to defend it.
April 18, 2014 -- Updated 1311 GMT (2111 HKT)
John Sutter: Bad news, guys -- the pangolin we adopted is missing.
April 21, 2014 -- Updated 1825 GMT (0225 HKT)
Ben Wildavsky says we need a better way to determine whether colleges are turning out graduates with superior education and abilities.
April 18, 2014 -- Updated 1026 GMT (1826 HKT)
Charles Maclin, program manager working on the search and recovery of Malaysia Flight 370, explains how it works.
April 18, 2014 -- Updated 1250 GMT (2050 HKT)
Jill Koyama says Michael Bloomberg is right to tackle gun violence, but we need to go beyond piecemeal state legislation.
April 17, 2014 -- Updated 1845 GMT (0245 HKT)
Michael Bloomberg and Shannon Watts say Americans are ready for sensible gun laws, but politicians are cowed by the NRA. Everytown for Gun Safety will prove the NRA is not that powerful.
ADVERTISEMENT