The talk in Washington is beginning to sound a little panicky when it comes to extending the Bush tax cuts.
With the 2001 and 2003 tax cuts soon approaching their expiration date like a carton of milk left on the supermarket shelf for too long, Congress is looking to restock with an extension for at least lower-income and middle-class taxpayers. The Obama administration is under pressure to abide by its campaign promise not to raise taxes on those making less than $250,000 a year. On the other hand, its also been hearing that if taxes go up on upper-income taxpayers, that could be enough to choke off economic growth, especially for small business owners.
The two sides have begun squaring off against the backdrop of the exploding federal budget deficit. While tax cuts are almost invariably politically appealing, especially in an election year, they carry the inevitable problem of reducing revenue that has to be made up in some way.
Unfortunately spending cuts will only go so far, and like tax cuts they are inevitably resisted by whichever groups see the budget cuts as affecting their own bottom line.
Congress is facing the difficult task of balancing the demands for deficit reduction against pressure to extend tax cuts that have been partly responsible for the growing budget gap. While tax cuts may help stimulate the economy for a time, they eventually tend to be taken for granted and need to be extended year after year just to keep voters or campaign contributors from protesting any tax hikes they can spot looming on the horizon.
If Congress takes the relatively easy way out and decides to extend all the tax cuts for only one more year, in the hopes that the economy will recover sufficiently by next year to start generating more revenue for the Treasury, that may be a politically popular decision, but it wont put them any closer to solving the long-term problems with the federal budget. And with the bipartisan deficit commission expected to produce its recommendations soon after the elections for how Congress and the administration should finally deal with the deficit, it wont be far from the expiration date of the last administrations tax cuts. In other words, the day of reckoning is not far off no matter what short-term fixes Washington decides to try.
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