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
September 1, 2014 -- Updated 1221 GMT (2021 HKT)
Carlos Moreno says atheists, a sizable fraction of Americans, deserve representation in Congress.
August 31, 2014 -- Updated 1625 GMT (0025 HKT)
Julian Zelizer says Democrats and unions have a long history of mutual support that's on the decline. But in a time of income inequality they need each other more than ever
August 31, 2014 -- Updated 0423 GMT (1223 HKT)
William McRaven
Peter Bergen says Admiral William McRaven leaves the military with a legacy of strategic thinking about special operations
August 29, 2014 -- Updated 1611 GMT (0011 HKT)
Leon Aron says the U.S. and Europe can help get Russia out of Ukraine by helping Ukraine win its just war, sharing defense technologies and intelligence
August 29, 2014 -- Updated 1724 GMT (0124 HKT)
Timothy Stanley the report on widespread child abuse in a British town reveals an institutional betrayal by police, social services and politicians. Negligent officials must face justice
August 30, 2014 -- Updated 0106 GMT (0906 HKT)
Peter Bergen and David Sterman say a new video of an American suicide bomber shows how Turkey's militant networks are key to jihadists' movement into Syria and Iraq. Turkey must stem the flow
September 1, 2014 -- Updated 1554 GMT (2354 HKT)
Whitney Barkley says many for-profit colleges deceive students, charge exorbitant tuitions and make false promises
August 29, 2014 -- Updated 1434 GMT (2234 HKT)
Mark O'Mara says the time has come to decide whether we really want police empowered to shoot those they believe are 'fleeing felons'
August 28, 2014 -- Updated 1432 GMT (2232 HKT)
Bill Frelick says a tool of rights workers is 'naming and shaming,' ensuring accountability for human rights crimes in conflicts. But what if wrongdoers know no shame?
August 29, 2014 -- Updated 0243 GMT (1043 HKT)
Jay Parini says, no, a little girl shouldn't fire an Uzi, but none of should have easy access to guns: The Second Amendment was not written to give us such a 'right,' no matter what the NRA says
August 30, 2014 -- Updated 1722 GMT (0122 HKT)
Terra Ziporyn Snider says many adolescents suffer chronic sleep deprivation, which can indeed lead to safety problems. Would starting school an hour later be so wrong?
August 29, 2014 -- Updated 1330 GMT (2130 HKT)
Peggy Drexler says after all the celebrity divorces, it's tempting to ask the question. But there are still considerable benefits to getting hitched
August 29, 2014 -- Updated 1849 GMT (0249 HKT)
The death of Douglas McAuthur McCain, the first American killed fighting for ISIS, highlights the pull of Syria's war for Western jihadists, writes Peter Bergen.
August 26, 2014 -- Updated 2242 GMT (0642 HKT)
Former ambassador to Syria Robert Ford says the West should be helping moderates in the Syrian armed opposition end the al-Assad regime and form a government to focus on driving ISIS out
August 27, 2014 -- Updated 1321 GMT (2121 HKT)
Ruben Navarrette says a great country does not deport thousands of vulnerable, unaccompanied minors who fled in fear for their lives
August 27, 2014 -- Updated 1319 GMT (2119 HKT)
Robert McIntyre says Congress is the culprit for letting Burger King pay lower taxes after merging with Tim Hortons.
August 26, 2014 -- Updated 2335 GMT (0735 HKT)
Wesley Clark says the U.S. can offer support to its Islamic friends in the region most threatened by ISIS, but it can't fight their war
August 26, 2014 -- Updated 2053 GMT (0453 HKT)
America's painful struggle with racism has often brought great satisfaction to the country's rivals, critics, and foes. The killing of Michael Brown and its tumultuous aftermath has been a bonanza.
August 26, 2014 -- Updated 1919 GMT (0319 HKT)
Rick Martin says the death of Robin Williams brought back memories of his own battle facing down depression as a young man
August 26, 2014 -- Updated 1558 GMT (2358 HKT)
David Perry asks: What's the best way for police officers to handle people with psychiatric disabilities?
August 25, 2014 -- Updated 1950 GMT (0350 HKT)
Julian Zelizer says it's not crazy to think Mitt Romney would be able to end up at the top of the GOP ticket in 2016
August 25, 2014 -- Updated 2052 GMT (0452 HKT)
Roxanne Jones and her girlfriends would cheer from the sidelines for the boys playing Little League. But they really wanted to play. Now Mo'ne Davis shows the world that girls really can throw.
August 25, 2014 -- Updated 2104 GMT (0504 HKT)
Kimberly Norwood is a black mom who lives in an affluent neighborhood not far from Ferguson, but she has the same fears for her children as people in that troubled town do
August 22, 2014 -- Updated 2145 GMT (0545 HKT)
It apparently has worked for France, say Peter Bergen and Emily Schneider, but carries uncomfortable risks. When it comes to kidnappings, nations face grim options.
ADVERTISEMENT