Is Letting the “Bush” Tax Cuts Expire a “Tax Increase?”

July 27, 2010

Throughout the Bush tax cuts debate, we often hear of a semantic debate over whether allowing those tax cuts that are set to expire actually expire can be called a "tax increase."

For simple communications purposes, when explaining it to taxpayers, I personally refer to it as a tax increase because people's tax bills are going to be higher next year than this year. Tax policy is hard enough to communicate to the American public without explaining the concept of a baseline, which is where the answer to the question posed in this blog post lies.

But it is a good thought exercise for those in the policy world.

Let's look at it the other way. If Republicans would have been successful at letting the Democrats' continual unemployment benefits extension expire, would that have constituted a cut in unemployment benefits? Or suppose tax rates were scheduled to be lower in 2011 than 2010, would stopping that constitute a tax increase? (Or how about the stimulus spending…it's temporary, so when spending "falls" in 2011, will Obama be cutting spending?")

The answer is that it depends on your baseline. Oddly enough, the baseline used by the Obama administration (current policy extended on both spending and tax) would imply that Obama is raising taxes by allowing some of the tax cuts to expire (i.e., those on high-income tax returns). Using the CBO's baseline of current law, merely extending 2010 policy into 2011 would constitute a tax cut, and Obama would be considered a huge tax cutter (even if he allowed the cuts to expire for high-income returns).

(I would be curious to see whether taking away a scheduled reduction in tax rates would constitute a violation of the famous "pledge" by Americans for Tax Reform. If so, if ATR is consistent, then allowing the Bush tax cuts to expire would not be a violation of the pledge.)

In the end, this debate is mostly semantics, and while it's fun for budget geeks to debate over what the proper baseline is, we know for certain that Americans' paychecks will be lower on January 15 compared to December 31 if the tax cuts are not extended.

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