NEW YORK (CNNMoney.com) — With income tax rates set to go up on Dec. 31, Congress is hotly debating what to do next. But most economists agree: Keep them where they are.
One option, to let the tax cuts passed during the Bush administration expire for only the richest 3% of taxpayers while renewing them for everyone else, is popular among Democrats and the choice of the Obama administration.
But a majority of a panel of leading economists surveyed by CNNMoney.com said that the tax cuts should be renewed for everyone.
The first in a series of economic surveys revealed that extending the tax cuts for all taxpayers is the most important thing Congress can do to help the economy. Of the 31 economists surveyed, 18 chose that from a list of options now being debated on Capitol Hill.
“Extend tax cuts for all income levels and do nothing else,” said Sean Snaith, economics professor at the University of Central Florida. “More of the same piecemeal, patchwork policies put forth by this administration will undermine confidence and do little to change the path the economy is on.”
Three economists surveyed endorsed the Obama administration’s plan to extend the tax cuts only for the lower- and middle-income taxpayers, but allow it to go up on those in the top two brackets — individuals making more than $200,000 a year or couples earning $250,000 or more. That limited increase in taxes would raise an estimated $700 billion over the next 10 years.
See the full survey results
Some experts, such as former Federal Reserve chairman Alan Greenspan, argue that with the size of U.S. budget deficit, the government can’t afford to extend anyone’s tax break.
But economists surveyed were in broad agreement that the recovery is still too fragile to allow taxes to go up for the 97% of taxpayers not in the top brackets.
“If those tax cuts expire for everybody, we go into a double-dip recession,” said Mark Zandi, chief economist of Moody’s Analytics.
Zandi and some of the economists calling for an extension of cuts for the wealthy want to phase out the lower rates for those taxpayers after a couple of years to limit the cost to the Treasury.
Higher taxes are generally believed to be a drag on the economy since it leaves consumers and businesses with less money to spend. Those who argue for extending the tax cuts for the wealthy say that raising those tax rates would hit many small businesses and could put a crimp in hiring.
Those who want to allow the rates to rise for the top earners argue they are more likely to save the money rather than spend it, and thus the tax cut would have less of an economic impact than would lowering the taxes for most other taxpayers.
“I would prefer that the tax cuts for the two upper brackets would also be extended, but there is much more spending [that needs to be done] and much more of an economic impact from extending the tax cuts for everybody else,” said Dana Johnson of Comerica Bank, one of those who endorsed the Obama plan to let taxes rise on the top earners.
Four of the economists surveyed backed the plan that passed the Senate Thursday to provide funding and other incentives to spur more lending to small businesses.
Another five suggested other choices of their own, including taking more steps to stop home foreclosures, reforming the overall tax system, resuming drilling for oil in the Gulf of Mexico and having the Federal Reserve do more to provide credit directly to businesses and consumers.
Only two cited additional help for long-term unemployed and more help to cash-strapped state and local governments as their top priorities.