CRS: Permanently Extending Bush Tax Cuts to Cost $5 Trillion

This guy has a point...In a report released last week, the Congressional Research Service (CRS) revised the total cost of permanently extending all of the Bush tax cuts to $5.048 trillion over the next ten years. The revised amount, which is significantly higher than the $2.8 trillion figure CRS reported in September, takes into account the cost of servicing the debt due to lost revenue and indexing the alternative minimum tax (AMT) to inflation.*

The report examines the possible impacts on the economy if Congress extends, or fails to extend, all or some of the Bush tax cuts. CRS presents the options at each extreme of the spectrum of solutions thusly:

Allowing the Bush tax cuts to expire as scheduled will somewhat improve the fiscal condition, but could stifle the economic recovery. At the other extreme, permanently extending all of the Bush tax cuts would not undercut the economic recovery, but would worsen the longer-term fiscal outlook and possibly signal a lack of progress in dealing with the long-term fiscal situation.

Interestingly, CRS finds that if Congress allows "the tax cuts targeted to high income taxpayers to expire as scheduled," it "could help reduce budget deficits in the short-term without stifling the economic recovery."

As for the revised total cost of permanently extending the tax cuts, CRS observes that debt service costs alone would amount to roughly $606 billion between now and 2020. Indexing the AMT to inflation, which CRS sees as likely occurring with extension of the tax cuts, makes up the remaining 1.637 trillion.

In August, the Congressional Budget Office (CBO) estimated that extending the Bush tax cuts would cost roughly $3.312 trillion over ten years. This is the figure most politicians and pundits cite when discussing extension of the tax cuts. However, those figures – while including the cost of debt servicing – do not include indexing the AMT to inflation. Indeed, when taking indexing into consideration, CBO comes up with a figure close to CRS's: $4.840 trillion.

Granted, Congress doesn't have to index the AMT to inflation when they ultimately come to a decision on the Bush tax cuts. If they fail to index the AMT, though, Congress will have to add it in as it passes a patch each year, which is the least effective way to deal with the issue.

These new numbers, along with CRS's recognition that Congress will not "stifle the economic recovery" if it allows the high income tax breaks to expire, should give pause to fiscal hawks on Capitol Hill. Those that swear up and down to the god of fiscal responsibility about the absolute need to permanently extend the Bush tax cuts, especially those that claim Congress should do so without offsetting the loss of revenue, are not faithfully examining the evidence before them.

*This post has been updated to clarify CRS and CBO findings on the cost of extending the Bush tax cuts.

Image by Flickr user ItzaFineDay used under a Creative Commons license.

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