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
October 22, 2014 -- Updated 2101 GMT (0501 HKT)
Paul Callan says the grand jury is the right process to use to decide if charges should be brought against the police officer
October 23, 2014 -- Updated 1619 GMT (0019 HKT)
Theresa Brown says the Ebola crisis brought nurses into the national conversation on health care. They need to stay there.
October 21, 2014 -- Updated 2235 GMT (0635 HKT)
Patrick Hornbeck says don't buy the hype: The arguments the Vatican used in its interim report would have virtually guaranteed that same-sex couples remained second class citizens
October 24, 2014 -- Updated 1336 GMT (2136 HKT)
Paul Begala says Iowa's U.S. Senate candidate, Joni Ernst, told NRA she has right to use gun to defend herself--even from the government. But shooting at officials is not what the Founders had in mind
October 23, 2014 -- Updated 2208 GMT (0608 HKT)
John Sutter: Why are we so surprised the head of a major international corporation learned another language?
October 23, 2014 -- Updated 2154 GMT (0554 HKT)
Jason Johnson says Ferguson isn't a downtrodden community rising up against the white oppressor, but it is looking for justice
October 24, 2014 -- Updated 1621 GMT (0021 HKT)
Sally Kohn says a video of little girls dressed as princesses using the F-word very loudly to condemn sexism is provocative. But is it exploitative?
October 21, 2014 -- Updated 2006 GMT (0406 HKT)
Timothy Stanley says Lewinsky is shamelessly playing the victim in her affair with Bill Clinton, humiliating Hillary Clinton again and aiding her critics
October 23, 2014 -- Updated 1414 GMT (2214 HKT)
Imagine being rescued from modern slavery, only to be charged with a crime, writes John Sutter
October 21, 2014 -- Updated 1600 GMT (0000 HKT)
Tidal flooding used to be a relatively rare occurrence along the East Coast. Not anymore, write Melanie Fitzpatrick and Erika Spanger-Siegfried.
October 21, 2014 -- Updated 1135 GMT (1935 HKT)
Carol Costello says activists, writers, politicians have begun discussing their abortions. But will that new approach make a difference on an old battleground?
October 21, 2014 -- Updated 1312 GMT (2112 HKT)
Sigrid Fry-Revere says the National Organ Transplant Act has caused more Americans to die waiting for an organ than died in both World Wars, Korea, Vietnam, Afghanistan and Iraq
October 21, 2014 -- Updated 1851 GMT (0251 HKT)
Crystal Wright says racist remarks like those made by black Republican actress Stacey Dash do nothing to get blacks to join the GOP
October 21, 2014 -- Updated 2207 GMT (0607 HKT)
Mel Robbins says by telling her story, Monica Lewinsky offers a lesson in confronting humiliating mistakes while keeping her head held high
October 20, 2014 -- Updated 1329 GMT (2129 HKT)
Cornell Belcher says the story of the "tea party wave" in 2010 was bogus; it was an election determined by ebbing Democratic turnout
October 20, 2014 -- Updated 2012 GMT (0412 HKT)
Les Abend says pilots want protocols, preparation and checklists for all contingencies; at the moment, controlling a deadly disease is out of their comfort zone
October 20, 2014 -- Updated 0336 GMT (1136 HKT)
David Weinberger says an online controversy that snowballed from a misogynist attack by gamers into a culture war is a preview of the way news is handled in a world of hashtag-fueled scandal
October 20, 2014 -- Updated 1223 GMT (2023 HKT)
Julian Zelizer says Paul Krugman makes some good points in his defense of President Obama but is premature in calling him one of the most successful presidents.
October 20, 2014 -- Updated 0221 GMT (1021 HKT)
Conservatives can't bash and slash government and then suddenly act surprised if government isn't there when we need it, writes Sally Kohn
October 22, 2014 -- Updated 1205 GMT (2005 HKT)
ISIS is looking to take over a good chunk of the Middle East -- if not the entire Muslim world, write Peter Bergen and Emily Schneider.
October 20, 2014 -- Updated 1300 GMT (2100 HKT)
The world's response to Ebola is its own sort of tragedy, writes John Sutter
October 17, 2014 -- Updated 2033 GMT (0433 HKT)
Hidden away in Russian orphanages are thousands of children with disabilities who aren't orphans, whose harmful treatment has long been hidden from public view, writes Andrea Mazzarino
October 18, 2014 -- Updated 1722 GMT (0122 HKT)
When you hear "trick or treat" this year, think "nudge," writes John Bare
October 18, 2014 -- Updated 0442 GMT (1242 HKT)
The more than 200 kidnapped Nigerian schoolgirls have become pawns in a larger drama, writes Richard Joseph.
October 17, 2014 -- Updated 1345 GMT (2145 HKT)
Peggy Drexler said Amal Alamuddin was accused of buying into the patriarchy when she changed her name to Clooney. But that was her choice.
October 16, 2014 -- Updated 2043 GMT (0443 HKT)
Ford Vox says the CDC's Thomas Frieden is a good man with a stellar resume who has shown he lacks the unique talents and vision needed to confront the Ebola crisis
October 18, 2014 -- Updated 0858 GMT (1658 HKT)
How can such a numerically small force as ISIS take control of vast swathes of Syria and Iraq?
October 17, 2014 -- Updated 1342 GMT (2142 HKT)
How big a threat do foreign fighters in Syria and Iraq pose to the West? It's a question that has been much on the mind of policymakers and commentators.
October 17, 2014 -- Updated 1221 GMT (2021 HKT)
More than a quarter-million American women served honorably in the Iraq and Afghanistan wars. Now they are home, we have an obligation to help them transition back to civilian life.
October 16, 2014 -- Updated 2027 GMT (0427 HKT)
Paul Begala says Rick Scott's deeply weird refusal to begin a debate because rival Charlie Crist had a fan under his podium spells disaster for the Florida governor--delighting Crist
October 16, 2014 -- Updated 0407 GMT (1207 HKT)
The longer we wait to engage on Ebola, the more limited our options will become, says Marco Rubio.
October 15, 2014 -- Updated 1153 GMT (1953 HKT)
Democratic candidates who run from President Obama in red states where he is unpopular are making a big mistake, says Donna Brazile
October 16, 2014 -- Updated 0429 GMT (1229 HKT)
At some 7 billion people, the world can sometimes seem like a crowded place. But if the latest estimates are to be believed, then in less than a century it is going to feel even more so -- about 50% more crowded, says Evan Fraser
October 20, 2014 -- Updated 1653 GMT (0053 HKT)
Paul Callan says the Ebola situation is pointing up the need for better leadership
October 15, 2014 -- Updated 2245 GMT (0645 HKT)
Nurses are the unsung heroes of the Ebola outbreak. Yet, there are troubling signs we're failing them, says John Sutter
October 15, 2014 -- Updated 1700 GMT (0100 HKT)
Dean Obeidallah says it's a mistake to give up a business name you've invested energy in, just because of a new terrorist group
October 15, 2014 -- Updated 2301 GMT (0701 HKT)
Fear of Ebola is contagious, writes Mel Robbins; but it's time to put the disease in perspective
October 14, 2014 -- Updated 1744 GMT (0144 HKT)
Oliver Kershaw says that if Big Tobacco is given monopoly of e-cigarette products, public health will suffer.
October 18, 2014 -- Updated 1335 GMT (2135 HKT)
Stop thinking your job will make you happy.
October 15, 2014 -- Updated 0208 GMT (1008 HKT)
Ruben Navarrette says it's time to deal with another scandal involving the Secret Service — one that leads directly into the White House.
October 14, 2014 -- Updated 1125 GMT (1925 HKT)
Americans who choose to fight for militant groups or support them are young and likely to be active in jihadist social media, says Peter Bergen
October 13, 2014 -- Updated 1303 GMT (2103 HKT)
Stephanie Coontz says 11 years ago only one state allowed same sex marriage. Soon, some 60% of Americans will live where gays can marry. How did attitudes change so quickly?
October 14, 2014 -- Updated 2004 GMT (0404 HKT)
Legalizing assisted suicide seems acceptable when focusing on individuals. But such laws would put many at risk of immense harm, writes Marilyn Golden.
October 13, 2014 -- Updated 1307 GMT (2107 HKT)
Julian Zelizer says the issues are huge, but both parties are wrestling with problems that alienate voters
October 13, 2014 -- Updated 2250 GMT (0650 HKT)
Mel Robbins says the town's school chief was right to cancel the season, but that's just the beginning of what needs to be done
October 11, 2014 -- Updated 1543 GMT (2343 HKT)
He didn't discover that the world was round, David Perry writes. So what did he do?
ADVERTISEMENT