This sort of political game may be fun for Republicans who think that they have boxed Democrats into a corner. But this game has had real economic consequences. Because the tax cuts are not permanent, their economic impact has been severely diminished.
All economists know that permanent tax changes have far more effect than temporary ones because people won't change their behavior significantly unless they have some assurance that the tax regime will be in effect for the long term. Businesses and individuals often make economic decisions that won't pay off for many years. If they think the tax system will be more unfavorable when the payoff comes, they will act differently, favoring smaller, short-term gains and rejecting opportunities for higher profits in the future.
There is little doubt that the economy would have been stronger with permanent tax cuts. But that would have meant fewer tax cuts and thus fewer opportunities to buy votes. It also would have forced Republicans to deal with the true budgetary consequences of their actions.
The reality is that we are not going to see the biggest tax increase in history in 2011 because neither Congress nor the White House will allow it to happen, regardless of which party is in control. The choice is not between full extension of all the Bush tax cuts or a massive tax increase, but between extension of the Bush tax cuts and some other sort of tax cuts that would keep the tax burden from rising on the vast majority of taxpayers.
Tax policy is an important campaign issue, and it would be good to get agreement on the post-2010 tax code as soon as possible. Current law makes it impossible to plan for the future with regard to taxes. Whatever is done should be done permanently to the greatest extent possible.
