Congress faces critical decisions about middle-class tax relief in the next two years. Most provisions of the Bush tax cuts are scheduled to expire at the end of 2010, as are the income tax cuts provided in the recent stimulus package. President Obama has proposed permanent extension of the Bush tax cuts, except for households with the highest incomes, as well as permanent extension of the stimulus tax cuts.
The concept of middle-class tax relief enjoys strong political support. Notably, the concept was endorsed by both President Obama and his Republican opponent during the 2008 presidential campaign. Nevertheless, I recommend that Congress not adopt a significant package of permanent middle-class tax relief at this time. Middle-class tax cuts provide limited incentives for the work and saving that drive economic growth while imposing substantial revenue costs. Adoption of a large package of permanent middle-class tax relief would add to the long-run fiscal imbalance and impede capital formation, increasing the fiscal burdens on future middleclass taxpayers and reducing wages for middle-class workers.
Alan D. Viard is a resident scholar at AEI.