It is a foregone conclusion that some sort of compromise is in the works with regard to the Bush tax cuts. President Obama is already signaling there is some wiggle room. More and more we are hearing that a temporary extension of 1, 2 or 3 years of all the Bush tax cuts is in the offing. The argument goes that this is no time to raise taxes on anybody in such a fragile economic environment. Doing so would risk dampening an already fragile recovery.
Republicans of course are pushing hard for a permanent extension of the Bush tax cuts. Democrats would like to see an extension of the current tax rates for those earning less than $250.000 and have the Bush tax cut expire for those earning more. Nobody is talking about letting the Bush tax cuts expire for everybody.
I would like to offer a possible compromise that offers a lot more stimulative punch than just a temporary extension for all.
Paul Krugman argued this morning on Fareed Zakaria GPS that continuing the Bush tax cut rate for those earning over $250,000 would be the least effective way to stimulate the economy. People in the higher income brackets are least likely to spend it. The continuation of this tax rate for the wealthy would add to the deficit but have very little stimulative impact on the economy.
So...
Why not let the tax rate for those earning over $250,000 expire at the end of the year as currently scheduled.
But here is the new idea to offer as a compromise. Agreeing with the argument that it is not a good time to take money out of the economy through higher taxes let's take the increased revenue taken in from the rates going up on the highest wage earners and give a further tax reduction in that amount for those earning less than $250,000. This would result in 0 dollars being pulled out of the economy due to taxes but give more money to those most likely to spend it. The result would be increased demand, hence greater job growth and higher tax receipts flowing into the government helping to shrink the debt.
I believe the Republicans would have a difficult time effectively arguing against this compromise.
The Democrats then could argue they are standing up for the middle class by further reducing their taxes.