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Would raising taxes on rich help or hurt?

WASHINGTON - Raising taxes on the wealthiest Americans, as President Barack Obama proposes to do, probably wouldn't wreck the moribund U.S. economy, but extending the tax cuts they've enjoyed since 2001 could spur some economic benefit.

A healthy dose of “it depends” is needed when assessing the economic merits of whether to collect more taxes from the rich.

Congress returns next week to begin debating whether to extend some or all of the tax cuts from 2001 and 2003 legislation that President George W. Bush signed into law. These temporary reductions in income, capital-gains and investment-dividend taxes are to return to the previous rates unless Congress extends them by year’s end.

Obama called again Wednesday to extend the tax cuts for all but the wealthiest 2 percent of taxpayers. He’d let the tax rate rise for single taxpayers with adjusted gross income above $200,000 and couples over $250,000. The higher rate would apply only to their earnings over those thresholds.

Republicans warn of disaster if all the tax reductions aren’t extended. Some Democrats in Congress appear increasingly wary of the administration’s approach, especially with prominent economists calling for a two-year extension for all the tax cuts, because they say the economy’s too weak to raise taxes on anyone yet.

Who’s right?

Some prominent analysts such as Mark Zandi, the chief economist for forecaster Moody’s Analytics, are calling on Obama to back off his tax-the-rich proposal. He’s no reflexive opponent of the president’s; Zandi’s praised Obama’s 2009 stimulus as effective in sparking today’s weak recovery after the economy’s near-collapse. However, he doesn’t think this latest proposal is well-timed.

“I think that given the very fragile recovery, policymakers shouldn’t take any chances. In all likelihood the recovery would remain intact ... but I think there is enough uncertainty and fragility that it would be prudent not to raise anyone’s taxes in 2011,” Zandi said in an interview.

He stresses that reverting to higher tax rates to help reduce soaring federal budget deficits will be appropriate later.

“I do think it’s reasonable to raise the rates on those upper-income households in 2012 and 2013,” he said.

Obama’s own former budget director, Peter Orszag, wrote a widely noted essay this week calling on the president to extend all the tax cuts for two years to provide a more hospitable business climate, and then to let them all expire, because that’s essential to reducing the spiraling national debt.

“Higher taxes now would crimp consumer spending, further depressing the already inadequate demand for what firms are capable of producing at full tilt,” Orszag wrote. “And since financial markets don’t seem at the moment to view the budget deficit as a problem … there is little reason not to extend the tax cuts temporarily.”

Then after two years, let them expire, he said, because “over the medium term, the tax cuts are simply not affordable. … (A)s the economy recovers, the dominant problem will move from depressed demand to excessive budget deficits.”

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