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HICKS: Tax-cut proposal probably a good compromise

December 11, 2010

In this column, in early April 2009, I hinted at the inevitability of an extension of the Bush tax cuts.

The reason for this was that this legislation (aka the Economic Growth and Tax Reconciliation Acts of 2001 and 2003) did two things that insured its longevity. First, it eliminated income taxes for about one in four households—all middle class. Second, about half of the much-maligned “rich” beneficiaries aren’t actually people, but businesses. This created quite a political formulary. So, with a quarter of America’s voters paying income taxes for the first time in a decade come April 2012 (during presidential primaries), coinciding with a momentous tax hike on small businesses, an extension was ultimately guaranteed.

The apparent deal that was struck this week continues the Bush tax cuts, extends unemployment compensation a further 13 months (to a full three years for as many as 2 million workers), keeps some educational tax credits from expiring, and reduces Social Security taxes 2 cents on the dollar. What does all this mean?

At worst case, the budget impact of these actions is about 10 percent of last year’s deficit. The extra unemployment benefits mean less than an extra $30 billion, and the education tax credits are no more than a few billion dollars. The Bush tax cuts that are extended for businesses and households that make more than $250,000 keep perhaps $60 billion away from the U.S. Treasury this year, probably only half that. So, why all the fuss and bother over a total bill that is 10 percent of last year’s deficit?

The Bush tax cuts in particular are politically charged. Many people want to see the rich taxed at higher rates, with little regard for the impact on the economy. Those folks are now angry at this compromise. Extending unemployment compensation is also politically charged. This extension will have some Americans receiving jobless benefits for a full three years, and many people are unhappy at this lengthy disincentive to work. These are ideas worth exploring.

The expiration of the tax cuts would have raised taxes on small businesses more than at any other time in history. The simple fear that a compromise would not be reached has slowed job creation at a time we desperately need the jobs. Some of that job creation will now be unleashed. The hard and simple truth is that wealthy people and businesses create jobs. Demonizing them for their success is irrational.

At the other end, there is concern over extending benefits another year. I am not worked up over it. Sure there are deadbeats on unemployment, but there’s no monopoly on deadbeats (must I again pen the word tenure?). The problem is that, for every person lazing about collecting unemployment, there’s also one in school and another whose house won’t sell. If we aren’t going to extend benefits now, when exactly would we?

In the end, the anger over the deal is perhaps the best sign that this is a good compromise.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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