Tuesday, September 14, 2010

Gridlock & Taxes - How Did We Get Here?

The debate over extension of the Bush tax cuts is an excellent example of political problems possibly creating bad policy outcomes. These tax cuts were implemented 10 years ago and contained reduction in the tax brackets for both middle and upper income earners. (By the way, it is worth mentioning that the way taxes work, even upper income earners benefit from a reduction in the lower brackets. Taxes are paid at different rates at each level of income. So, if the tax rate for $30,000 - $60,000 is lowered by one percent, that benefits both people whose taxable income falls in this range AND above that range).

There appears to be a consensus that letting all of these tax cuts expire now, during this slow recovery, would be bad for the economy. Obama only wants to extend the middle class tax cuts. Republican leaders in Congress want to extend all of them. However, if an agreement cannot be reached, and Republicans block any effort to extend only some of the tax cuts, then all of them will expire at the end of the year.

How did we get to this situation? This goes back to a weird procedure called "reconcilliation" which some of you may recall came up during the health care debate. This is one of the only procedures in Congress that cannot be subject to a filibuster in the Senate. In 2001, this procedure was used to enact the tax cuts, because the congressional leadership at the time did not want to have to reach the 60 vote threshold to defeat a filibuster. The hitch with reconcilliation is that anything passed through this procedure only lasts for 10 years. That is why the taxs cuts are all expiring. Irony is, however, that the tax cut legislation passed the Senate 62-38 (the first time through) and 58-33 (on the conference report, with at least two supporters absent).

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