Obama's alternative to repeal of Bush tax cuts

By Mark R. Warner, The Financial Times

When the US Congress returns next week it must decide what to do about the Bush administration’s tax cuts, due to expire in December. Against the backdrop of a frustratingly weak recovery, and amid justifiable concerns about a ballooning deficit, a bipartisan consensus has formed around at least maintaining these tax breaks for 98 per cent of Americans. The debate is now whether we should extend tax relief to the top 2 per cent, who earn more than $250,000 each year.

Republicans tend to argue that this is no time to remove spending power from an economy struggling to find its legs. Many Democrats meanwhile see re-instituting higher rates on top wage earners as a first step toward deficit reduction, and one that would present little hardship for wealthier taxpayers. A potential compromise to temporarily extend all the tax breaks for two more years has also gained traction in recent weeks, which the administration is actively considering.

However, this latter approach has problems beyond the $65bn that would be added to the deficit if we keep the cuts for people on the highest incomes. In Washington such “temporary” benefits also have a strange way of becoming permanent. What’s more, if Congress can justify punting on a politically difficult decision, it invariably will.

Meanwhile the non-partisan Congressional Budget Office has told us that extending tax breaks for the top 2 per cent would do little to stimulate our economy.

Instead the administration should consider an alternative compromise.

Extend the tax cuts just for 98 per cent, allowing the cuts for top wage earners to expire as scheduled. But instead of removing $65bn from the economy, we should work with the business community to enact $65bn in new, targeted business tax cuts and incentives to spur private-sector investment.

The logic of this proposal is clear. Our nation’s tax discussion occurs as we look for ways to jump-start the recovery through private-sector job growth. Yet while investment and job creation by businesses remains anaemic, corporate America is more profitable today than in the years leading into this recession. After two years of operational streamlining and painful payroll cuts, leading US corporations reported nearly $2 trillion in cash on their balance sheets at the end of the second quarter.

Yet these businesses currently appear reluctant to invest or create new jobs. Business leaders are understandably concerned about future demand. They also are hedging their bets until the economy begins to fire on all cylinders – and all in the knowledge that government’s traditional tools of monetary policy and fiscal stimulus are already deployed. That means our focus must turn to ways to encourage the private sector to move their trillions in cash off the sidelines and back into our economy.

My proposal does not grow the size of government, or increase tax revenues. Instead it moves tax cuts from one area to another, in order to encourage jobs and investment. It would also provide an excellent opportunity for policymakers to begin to repair their recent frayed relations with leaders of the US business community, at first by working together in a constructive partnership to determine exactly what these business incentives might look like.

In collaboration with business leaders, we might consider a more generous R&D tax credit, which clearly helps to fuel innovation, as well as more generous tax allowances for the expensing of business investment and some fine-tuning of depreciation allowances. Finally other short-term incentives that promote additional hiring, such as a temporary reduction in the payroll taxes paid by employers who hire new workers, could be part of any package.

As we think about how to strengthen our recovery and lower the deficit, I urge all parties to consider a constructive discussion about business tax policies as part of the solution. The extension of the Bush-era tax cuts presents an excellent opportunity to forge this new partnership – but only if all parties put aside partisan talking points. We should all be able to agree that additional investment by the private sector, and not simply by the government, must provide the fuel for the recovery that ultimately will power the growth and competitiveness of our nation.

What people are saying: 

One idea gaining attention is a proposal from Sen. Mark Warner (D-Va.) to let the cuts for the rich lapse and replace them with $65 billion worth of targeted tax cuts for business. Instead of being shaped in Washington, the tax cuts would be designed by business leaders.

"That would be a wonderful short-term incentive to get them to move cash off the sidelines" and into the struggling economy, Warner said in an interview.

- Obama seeking compromise on Bush tax cuts (Washington Post 11/13/10)

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As the White House staff settles on a strategy for the tax cut debate, they should consider an idea put forward by Sen. Mark Warner (D-VA). He has suggested that rather than extending the tax cuts for the top two percent, Congress consider a number of business tax cuts that would be far more likely to spur job creation and more sustained economic growth. He proposed a range of possible business tax cuts to create jobs, but my favorite is a temporary tax credit against payroll taxes. That is a direct way to reduce the costs of businesses hiring new workers, and I hope the White House includes this idea in whatever proposal it puts forward for consideration at next week’s bipartisan Congressional meeting.

The kinds of ideas put forward by Sen. Warner combined with middle class tax cuts and extending unemployment insurance are far sounder as temporary measures to aid economic recovery compared to Republicans’ push to make all the Bush tax cuts permanent. We obviously cannot afford to do that, but as a temporary measure to help American workers and our economy there are better measures than TARP 2 bonuses for millionaires.

- TARP 2: No Way To Create Jobs And Help Our Nation’s Economy Grow And Prosper(John Podesta, President and CEO of the Center for American Progress Action Fund, former Clinton Administration Chief of Staff, on Think Progress blog 11/12/10)

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Democratic Sen. Mark Warner of Virginia said in a separate Bloomberg Television interview that he favored allowing tax cuts for the wealthiest Americans to lapse and using the additional revenue for "targeted business-tax cuts" to encourage companies to hire more workers.

"Democrats are right" that a permanent extension of tax cuts for the highest-income Americans would add $700 billion to the deficit, said Warner, a former businessman who started a cellular telephone company. "Republicans are right" to argue that "if you take that money out of the economy you could perhaps stall the recovery," he said.

- Obama is open to compromise on tax cuts (Associated Press 11/14/10)

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Olberman: What do you think of this Warner plan, what Senator Mark Warner says, spend 70 billion but do it on jobs and business incentives?

Reich: Everybody is in favor of it and I like the idea in principle.

- Keith Olberman & Robert Reich (MSNBC's "Countdown" 11/12/10)