Report

Decision Time

The Fiscal Effects of Extending the 2001 and 2003 Tax Cuts

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Quick Summary

The income tax cuts of 2001 were enacted when the federal budget was running a surplus. The tax cuts of 2003, designed to boost the economy as it was showing signs of weakness, were approved before the federal debt rose to the top of the national agenda. Both sets of cuts are scheduled to expire at the end of 2010, and in the coming months Congress and the administration will have to decide whether to extend them at a time when the debt is climbing steadily but the economy remains fragile.

As the expiration date looms, several options are on the table. One option is to extend the tax cuts indefinitely, making them permanent for all taxpayers. Another is to limit the extension to individuals making less than $200,000 and married couples earning less than $250,000. In light of the continuing weakness in the economy, some have proposed extending the tax cuts for everybody for another two years. Finally, there is the option of allowing the cuts to expire as scheduled.

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