More on expiring tax cuts

It looks like interest in extending tax cuts for one more year for everyone is catching on per a USA Today article - "More Democrats lean against tax increases for the rich," 9/2/10. As I've noted before, for both tax policy and better stimulus reasons, I think Congress needs to work harder to target any tax cuts if they want to use this large amount of money to help the economy.

The CBO has a spreadsheet listing provisions that expire at the end of this year (as well as those that expired at the end of 2009 and were not (yet) renewed). I encourage you to take a look. The list is not detailed enough to indicate, for example, the cost of extending the lower capital gains rate to 97% of individuals (those with income under $250K if married or $200K if not married) versus also extending it to the other 3% (the group that has a lot of capital gains!).

I think the CBO list is one of several good tools that indicate that an across the board extension of all tax cuts is not a good idea. Once a temporary measure gets extended once, its likely to become either truly permanent or something that annually gets extended. One example of something that should be allowed to expire is the deduction for real property taxes for those who claim the standard deduction. Adding deductions to the standard deduction violates the purpose of the standard deduction, makes the law more complicated and more unfair (why allow non-itemizers to deduct real property taxes rather than something else)? If Congress believes the standard deduction is not large enough, they should increase it for everyone, not only for those with real property taxes. The CBO cost on this item is $26 billion over ten years.

That is just one example. I encourage you to take a look at the CBO spreadsheet.

If Congress and President Obama do decide to extend the 2001/2003 (and perhaps even some of the 2009 American Recovery & Reinvestment Act tax cuts) for one more year, why not add a requirement that all or some of the taxpayer savings be invested in some manner? For example, if you report capital gains in 2011 of more than $30,000 (or some other figure), you get the lower rate if you show you invested some portion of your proceeds in qualified small business stock or your local school (rather than buying other investments on the stock market). While this does complicate the tax law, this type of change would be for higher income individuals - which should be defined using lower dollar amounts than used by President Obama (I think his thresholds could be cut in half) - thus, the complication would be both temporary and affect less than 40% of individuals.

To continue tax cuts that are poorly targeted will not only increase the debt and deficit, but won't stimulate the economy. On the other hand, if the government collected those tax dollars, they could use them to stimulate the economy (hopefully). Another tax break that ends this year is the American Opportunity Tax Credit. As modified for 2009 and 2010, it provides a tax credit for individuals making up to $180K if married. At that income level, one should not need or receive taxpayer support to help send their children to college (for more on AOTC - here). This credit should not be extended in its current form, but modified to be better targeted to provide relief to those who need it (and when college aid is not given to those who don't need it, there is more available to provide to those who do need it).

What do you think? Should Congress just extend all tax cuts for one more year or only those it can target in such a way to address a true need or to truly help the economy?