The Bush Tax Cuts lowered tax rates across the board on income, dividends and capital gains; eventually eliminated the estate tax; further lowered burdens on married couples, parents and the working poor; and increased tax credits for education and retirement savings. They were passed during fairly rosy economic times — we had a budget surplus and the National Debt was declining. That’s no longer the case.
To pass the tax cuts, the Senate Republicans used the budget reconciliation process. Accordingly, they could only put them in place for a finite period of time (rules of that process). They used that process because they didn’t have the votes to pass it any other way and to get it they needed VP Cheney to cast the tie breaking vote. Those tax cuts, which are partly responsible for the economy being in the condition it’s currently in, will expire at the end of the year.
So, instead of doing something about fixing the economy and doing something about jobs, the big issue before the Congress this fall, leading into the election, will be “what to do about the Bush Tax Cuts.” The Republican contingent in both houses wants to extend them as is. President Obama’s proposal would extend most of these reductions, allowing only those for individuals making more than $200,000 and families making more than $250,000 to expire. The tax cuts under either scenario are unpaid for and will increase both the Budget Deficit and the National Debt.
The full tax cut package amounts to roughly $700 Billion, most of which will be going to the uber-rich. We need an appropriate progressive tax system that works effectively in both the short-, mid- and long-term. Extending the Bush Tax cuts doesn’t fit that bill. It’s the equivalent of quitting a very good paying job to take a job flipping burgers at McDonald’s … and then borrowing from everybody and their brothers to be able to pay your bills. At some point, the amount of debt that is continually amassed becomes a serious national security problem when they start calling in the debt.
The Myths [read full WP article here]:
- Extending the tax cuts would stimulate the economy.
Most of the tax cut dollars benefit higher income earners who don’t spend as much on durable goods and instead buy things like additional vacation homes, jewelry, art, savings, etc. These folks are not reinvesting in business and industry to provide more jobs. Thus, any potential stimulative effect is lost. According to the Congressional Budget Office (CBO), an extension of all of the Bush tax cuts ties for lowest bang for the buck. The government could more effectively stimulate the economy by letting the high-income tax cuts expire and using the money for aid to the states, extensions of unemployment insurance benefits and tax credits favoring job creation. Dollar for dollar, each of these measures would have about three times the impact on GDP as continuing the Bush tax cuts.
- Allowing the high-income tax cuts to expire would hurt small businesses.
If, as proposed, the Bush tax cuts are allowed to expire for the highest earners, the vast majority of small businesses will be unaffected. Less than 2 percent of tax returns reporting small-business income are filed by taxpayers in the top two income brackets — individuals earning more than about $170,000 a year and families earning more than about $210,000 a year.
- Making the tax cuts permanent will lead to long-term growth.
A main selling point for the cuts was that, by offering lower marginal tax rates on wages, dividends and capital gains, they would encourage investment and therefore boost economic growth. That selling point ignores the fact that the cuts decrease government revenue and increase government debt in the process. With the government competing for dollars in the lending market, the cost to businesses of making new investments goes up as the cost of capital goes up.
- The Bush tax cuts are the main cause of the budget deficit.Regardless of how much I’d like to say this one is true, unfortunately, it’s blatantly false. In 2007, well after the tax cuts took effect, the budget deficit stood at 1.2 percent of GDP. By 2009, it had increased to 9.9 percent of the economy. As we sank into recession, the economy shrank and tax revenue plummeted. The cost of the bank bailouts and stimulus packages further added to the deficit. The Bush tax cuts account for only about 25 percent of the deficit this year.
- The tax cuts aren’t the problem; entitlements are the real problem.
The deficits we face over the next decade reflect a fundamental imbalance between spending and revenue, one that goes beyond entitlements. Based on projections by the CBO, even if the economy returns to full employment by 2014 and stays there for the rest of the decade, the continuation of current fiscal policies, including the Bush tax cuts, would lead to a national debt in the range of 90 percent of GDP by 2020. The yearly deficit would rise to 6-7% of GDP by 2020. The Bush tax cuts would account for a significant chunk of that, considering that in each year they are in effect, the revenue lost because of them amounts to nearly 2 percent of GDP. Compounding the problem: By increasing the government’s debt, the tax cuts have already led to higher interest payments on that debt. So even if all of the cuts expire on Dec. 31, we will still be paying for them for years to come.
Extending the Bush Tax cuts without paying for them is pure folly.
- Washington Post: 5 Myths about the Bush Tax Cuts
- Forbes: How Will The Expiring Bush Tax Cuts Affect You?
- Huffington Post: Extending Bush Tax Cuts Without Paying For Them Could Be ‘Disastrous’