United Liberty

Realizing that tax hikes will hinder an economic recovery, Peter Orzag, who until recently served as President Barack Obama’s budget director, is calling for a two year extention of the Bush tax cuts:

In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.

Why does this combination make sense? The answer is that over the medium term, the tax cuts are simply not affordable. Yet no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.

Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt. And since financial markets don’t seem at the moment to view the budget deficit as a problem — take a look at the remarkably low 10-year Treasury bond yield — there is little reason not to extend the tax cuts temporarily.

The sentiment is shared by Christina Romer, another one of President Obama’s ex-economic advisers, who warned that tax hikes in a recession will only hinder economic growth while tax cuts “have very large and persistent positive output effects.”

No proposal currently exists in Congress to extend any of the tax cuts set to expire at the end of the year, either for the middle class or to extend all of them. President Obama has only offered tax credits and rebates, which are direct spending as noted by Zach yesterday and largely do nothing to spur economic growth.

Rep. Paul Ryan (R-WI) has offered to come up with $700 billion in spending cuts over the next 10 years to pay for the extention of the tax cuts.