Adding Good Tax Cuts to Bad Doesn’t Make Tax Extenders a Good Deal

Last week, President Obama indicated he would veto an emerging Senate deal that cobbled together $440 billion worth of tax breaks, with big business reaping the vast majority of the benefits. The rationale for the veto threat was that the potential “tax extenders” deal did not make permanent the expansions of the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), which were originally included in the Recovery Act and are currently set to expire in 2017.

The veto threat has been portrayed as dividing Democrats in two groups: those that would have been willing to vote for the nearly-agreed upon $440 billion tax deal as is, versus those that would have only accepted the deal had it included the EITC and CTC.

Not mentioned: anyone who thinks that simply tacking on an expanded EITC and CTC on top of the Senate agreement would still be bad policy, and that these issues should get disentangled, quickly—a group which, spoiler alert, contains EPI.

To be clear, the expanded EITC and CTC are good policies, and both should be a permanent part of our tax code. The Center on Budget and Policy Priorities writes that letting the expansions expire would push 16 million people—including 8 million children—either into or deeper into poverty. The steep progressivity of taxes at the bottom of the income distribution helps a lot of needy people and also aids the cause of economic recovery; the people that receive the EITC and CTC tend to spend the money, helping it circulate throughout the economy quickly. And the cost for making these expansions permanent—$96 billion between now and the end of the 10-year budget window in 2024—is pretty modest compared to the packages floating around the House and Senate this week.

We’ve previously noted why simply renewing these tax breaks year after year with no reflection is bad policy. But simply making the whole jumble permanent is not the right answer, either. Take the recently-scuttled Senate tax extender deal. It would have made permanent (at a ten-year cost of $156 billion) a greatly-expanded Research and Experimentation Tax Credit, widely used by big businesses but with very uncertain benefits. Or how about “bonus depreciation,” a corporate tax break that would cost almost $300 billion over the next decade if made permanent, but which is called a “relatively ineffectual tool for stimulating the economy” by the Congressional Research Service?

Why should these expensive but flawed tax breaks take precedence over increased investments in infrastructure, or early childhood education, or even the incredibly cheap one-year extension of Emergency Unemployment Compensation? And why, unlike nearly everything else proposed in recent years, are these tax breaks exempt from the rule that they must be offset with “pay-fors”?

For all these reasons, the president’s critique of tax extender legislation is too narrow. The merits of the tax extenders should be debated separately from the extension of the expanded EITC and CTC. The most glaring flaws in American fiscal policy are that we’re spending too little (especially in the near term) and not raising enough revenue (especially in the long term). An expanded EITC and CTC simply tacked on top of a fundamentally flawed tax extenders package would not do much to solve those problems.