The Bush tax cuts are set to expire this year.
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The Bush tax cuts, which cost $1.7 trillion between 2001 and 2008, are set to expire at year’s end, posing several critical questions: Which tax cuts should be extended and for whom? Will permanent cuts boost the economy?
Due to the sluggish economy, letting all the cuts expire this year would be a mistake. President Obama wants to keep reductions for those who would most benefit – families making less than $250,000 annually. This would cost $629 billion less than the 10-year price of extending all the Bush cuts, while still providing tax relief to roughly 95 percent of the population.
Extending tax cuts for the rich is highly inefficient. Both economic theory and countless studies suggest that the wealthy are likely to save most, if not all, of a tax cut. When tax cuts increase the disposable income of lower-income earners, however, those people quickly spend it – on everything from rent to groceries and automobiles. This spending helps businesses thrive, strengthening our recovery.
Tax cuts do not pay for themselves, and revenue – stretched far too thin these days – should not be sacrificed for those who can most afford to pay. That $629 billion should instead be put toward investments that can strongly stimulate the economy. According to Moody’s Analytics, each dollar spent on infrastructure generates $1.57 in economic activity, and each dollar in general aid to state governments (to help prevent, for example, teacher layoffs) generates $1.41. Such spending would also create thousands of jobs. A dollar of income-tax cuts, however, generates only 32 cents. Tax cuts for the wealthy are costly, and simply not an effective way to grow the economy.