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Dear Congress: Don't blow it on Bush tax cuts

chart_tax_cuts.gif By Maya MacGuineas, CNNMoney guest columnist

Commentary: Maya MacGuineas is the director of the fiscal policy program at the New America Foundation.

Ahem. Excuse me, Congress? I don't mean to nag, but there are 58 more working days until the Bush tax cuts expire. Trust me, I get it: I always waited to cram until the night before the test. Still, shouldn't you get a move on?

I know there are a lot of possible combinations of tax extensions floating around. To help move things along, here are a number of options, ranked in order from best to worst.

Bingo! Fundamental tax reform

By far the best option would be an overhaul of the tax code.

No one needs to be convinced that our current system is a mess. It is outdated, overly complex, a drag on economic growth, and as leaky as an old fisherman's dingy.

There is really nothing to love there.

Reforms with the most potential:

  • close many of the more than $1 trillion in loopholes that permeate the code;
  • modernize the corporate income tax so we don't stifle business with one of the highest marginal tax rates in the world;
  • shift away from taxing income toward taxing consumption;
  • and replace some of our less desirable taxes such as the payroll tax with a broad-based energy tax.

This will take some fortitude. For example, those "loopholes" include things we all love like the home mortgage interest deduction or the tax break for state and local taxes, not just pernicious corporate welfare which is so easy to oppose.

And even though Sens. Judd Gregg and Ron Wyden have a bipartisan bill that could serve as a solid starting point, and former President Bush's tax commission issued a report chock full of good ideas, getting this done in 58 days is a tall order. This one may have to come later.

Next best: Let cuts expire but enact temporary stimulus

The economic argument for keeping the tax cuts in place, even in the face of immense fiscal pressures, is that now is not the time to pull so much liquidity out of the economy.

True. However, these tax cuts are not particularly stimulative.

A better option would be to let all the tax cuts expire, but use the money they would have cost over the next two years for more targeted and effective stimulus measures -- such as unemployment benefits, aid to states, a payroll tax cut, business incentives or more help for the weakest sectors such as housing.

All told, such an approach would cost roughly $350 billion over the next two years, but save almost $3 trillion over the decade. And, importantly, it would surely do at least twice as much good for the economy.

Hold your nose: Temporary extension

The political compromise many are leaning toward is extending some or all of the tax cuts temporarily and then deciding what to do.

Yes, punt.

This approach could be useful if it came with an ironclad commitment not to extend the tax cuts again without combining them with a full-fledged budget reform deal or a pledge to offset their costs.

Of course, the risk is that they just become another Alternative Minimum Tax patch or Medicare "doc fix." These supposedly "temporary" budget maneuvers actually cause budget mayhem year after year as policymakers enact last-minute extensions with no budgetary offsets.

In terms of particulars, extending the tax cuts only for those making less than $250,000 is preferable to extending them all, and would save around $100 billion over two years. (I refuse to call this the middle class, because really, since when did the 98% percentile become the middle class?)

A one-year extension is too short if we want to get even some stimulative effect, but if they end up being extended for all income levels, it's worth staggering them so that tax cuts for the wealthiest expire after one year and the rest do after two or three years.

Don't fall for it: Extend cuts temporarily for all making less than $1 million

This is one of those compromises that makes you want to say, "just stop already." It's the kind of slippery slope policymaking that happens too often in Washington. Soon we'll be hearing about extending all the tax cuts except specifically those for Bill Gates and Warren Buffett.

For sure, we need to address the country's growing income inequality problem. The tax code and spending side of the budget should be more progressive. But we can't just lump all the responsibility for paying taxes on a few hedge-fund types. The government needs more revenue, and everyone has to be part of the solution.

No! No! No! Permanent extension

Don't do it. We can't afford it. It will make climbing out of the fiscal hole we are in nearly impossible.

It is absurd that there's even a debate. Extending all of the Bush tax cuts will add $3.7 trillion to the debt, and extending them for those making less than $250,000 a year will add $3 trillion.

So what will Congress do? My bet is on a two-year temporary extension for all of the tax cuts -- or maybe three years to get us through the next election.

But hope springs eternal: I am not giving up on fundamental reform. To top of page

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