Outside editorial: Expiring tax cuts offer opportunity

Posted: Monday, April 27, 2009

The looming expiration of the Bush tax cuts offers an opportunity that the Obama administration and the Democratic Congress seem determined to squander. No one is proposing allowing all the tax cuts to expire as scheduled, on Dec. 31, 2010, nor should they. But a rational discussion of tax policy would include thoughtfully weighing which tax cuts to keep in place, which ones to pay for and perhaps even which taxes to increase. It may not surprise you to learn that this is not happening. Instead, Congress is busy figuring out how to best break its own rules - the ones that supposedly require tax cuts to be paid for rather than simply tacked on to the already bulging bill for the next generation. Meanwhile, President Obama has appointed a tax reform panel - a good idea - but counterproductively constrained its mission.

In an ideal world, the House and Senate would stick to their pay-as-you-go rules and offset the costs of any new tax cuts, either by raising other revenue or reducing spending. But the Senate, in its version of the budget resolution, assumes that pay-go rules will be waived to allow extension of the expiring income tax cuts for families making less than $250,000, the estate tax cuts and a temporary fix for the alternative minimum patch. The House wants to achieve the same result through a different mechanism: It would explicitly exempt these tax cuts from having to be paid for, but insist that, going forward, the rules will be really, really strict. Between the two positions, the House is right: A stricter rule is better. But a negotiation about whether to keep pay-go but waive it (the Senate solution) or to alter the rule so it is only in place once you have broken the original version (the House option) misses the larger point: Given the fiscal picture, it is absurd to consider borrowing to cover the costs of more than $2 trillion in tax reductions. For years now, the House and Senate have been limping along, patching things here and waiving things there, adding to the deficit all along the way. This would be a good time to stop.

Then there is the new tax reform panel, headed by Paul Volcker. The panel's instructions are to make recommendations for closing corporate tax loopholes, closing the gap between taxes paid and taxes owed, and simplifying the tax code. Great, as far as it goes. But the instructions unduly limit the panel's purview: Taxes cannot go up for any family earning less than $250,000 a year. As we have said before, this is not a sustainable or rational tax policy. By imposing that limit on the tax panel, the president is denying himself a political opening to get out of a campaign promise that, a few years and a couple of trillion dollars in debt later, will make even less sense. Volcker has said that he would like to work on the more fundamental issues of tax reform, once the panel has completed its first round of tax recommendations. Our recommendation, to Congress and Volcker: Get started now.



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