Full tax-cut extension good in short term, worse in long run, CBO director says

A full, permanent extension of the Bush tax cuts could help the economy grow by nearly 2 percent more next year — and would be a bigger boost than just a partial extension, Congress’ chief scorekeeper said Tuesday.

Douglas Elmendorf, director of the Congressional Budget Office, said that both letting the tax cuts expire — they are slated to end under current law later this year — and ending stimulus spending would be the biggest drags on the economy over the next few years.

But Mr. Elmendorf also said the larger and longer the tax cuts, the worse the effect over the long run, since added federal deficits eventually would crowd out private investment. He also said the tax cuts have a “lower bang for the buck” than many other options for government action, such as extending unemployment benefits or cutting businesses’ payroll taxes.

“What I hear you saying is anything we do to provide stimulus — whether it’s increased spending or additional tax cuts — would give you a short-term boost, but either of them … will actually hurt longer-term growth,” said Sen. Kent Conrad, North Dakota Democrat, who is Budget Committee chairman.

Mr. Elmendorf said the long-term problems from tax cuts could be offset if the government were to lower spending. He also said there’s a substantial margin of error in the predictions of how the economy will respond to tax cuts, because it depends greatly on how taxpayers respond to having more money in their pockets.

Democratic leaders, unable to find unity within their own party over how to handle the Bush tax cuts, have pushed off voting on an extension until after the election.

President Obama has called for extending the cuts for most Americans but wants taxes to rise for high-income taxpayers. But Republicans, joined by a significant number of rank-and-file Democrats, have said all the tax cuts should be extended so as not to hurt the economy.

The cost of extending all the tax cuts is $3.7 trillion over 10 years. But since both parties agree on extending about $3 trillion of those cuts, the central argument is over the remaining $700 billion that would go to higher-income taxpayers.

One key swing lawmaker, Sen. Joseph I. Lieberman, Connecticut independent, this weekend said he expects Congress to approve a long-term extension of the lower rates and a short-term extension, for a year or two, of the higher-income rates.

One emerging area of agreement between both parties is the need for a major overhaul of the tax code.

“Broadening the base and lowering the tax rates is the best way to go,” Sen. John Ensign, Nevada Republican, said.