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The Bush Tax Cuts and the “R” Word

With an assist from erstwhile OMB Director Peter Orszag in the form of an op-ed in Monday’s New York Times, the question of which of the 2001 Bush tax cuts to extend, and for how long, has quickly become the issue du jour in Washington (when we’re not talking about obscure preachers burning Korans). During his speech in Cleveland on Wednesday, President Obama argued on behalf of his proposal to extend only those provisions affecting taxpayers with incomes below $200,000 a year (and couples with incomes below $250,000).

Much of the current debate centers on the affordability--or lack thereof--of extending these tax cuts in light of the burgeoning budget deficit. Supporters of the Obama proposal point out that extending the cuts affecting high-income taxpayers alone would cost more than $700 billion over 10 years. Others, however, are quick to point out that the so-called “middle-class” cuts will cost even more, about $2.3 trillion over the decade. Thus did Orszag propose that all the tax cuts sunset in 2013, in order to help reduce the deficit to “sustainable levels.” (Jon Chait, among others, has usefully exposed the potential folly of the White House agreeing now to a two-year extension of all the cuts.)

How extending all of the cuts, or some of the cuts, would affect the deficit is one important dimension along which to judge these proposals. Yet raising the revenue to pay for government isn’t the only role of the federal tax code. It also performs another crucial function--redistribution--that we’re not hearing much about these days, ever since it somehow got equated with socialism in the waning days of the 2008 campaign.

In that respect, the 2001 tax cuts did include a few provisions of real value to the workers and families who got no benefit out of economic growth in the 2000s. Our State of Metropolitan America report found that full-time, year-round workers near the bottom of the earnings distribution saw their wages drop by 8 percent in real terms between 1999 and 2008, from $8.70 to $8.00. Perhaps not coincidentally, the trend was even gloomier in the Cleveland metro area (down 10 percent).

Thankfully, though, a single mom with two kids earning that $8.00 wage today--about $16,000 a year--gets an earnings boost of $2,000 from the Child Tax Credit, due to a provision of the 2001 law (and subsequent expansions) that made the credit partially refundable. In the end, that amount really only makes up for the economic ground that typical worker lost during the 2000s (before the Great Recession, that is). And that family’s budget would be a whole lot bleaker without the extra $2,000. Other provisions of the law, such as the creation of the 10 percent tax bracket, also provide important support to moderate-income filers. Let all the cuts expire, and you hurt these folks, too.

So sure, let’s have a debate about what we can collectively afford. But let’s also make distinctions about who can afford it, given the rough decade that low-wage workers have been through, and not throw the redistributive baby out with the deficit-reduction bathwater.