Inconvenient Truths

by Pejman Yousefzadeh on September 8, 2010


That the Obama Administration should come out against extending the Bush tax cuts is really no surprise. But it should be noted that there are plenty of economists who take issue with the Administration’s stance on this matter. Consider the following words from a prominent economist:

In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.

Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.

Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets don’t seem at the moment to view the budget deficit as a problem — take a look at the remarkably low 10-year Treasury bond yield — there is little reason not to extend the tax cuts temporarily.

The economist in question? None other than former Obama Administration Budget Director Peter Orszag.

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