Bush Tax Cuts
With the economy expected to continue its sluggish pace as we head into 2011, some economists believe that the expiration of the Bush tax cuts will hurt the economic recovery:
The nascent US economic recovery would be halted in 2011 if Congress fails to extend the Bush tax cuts for the wealthiest Americans, analysts at Deutsche Bank said.
The cuts were enacted in 2001 and 2003 under President George W. Bush and covered those earning more than $250,000, but they are set to expire at the end of this year.
Deutsche said the drag on gross domestic product should they lapse could be as much as 1.5 percent, with the more likely impact at 1.1 percent.
The impact would be worse, the analysts said, if Congress fails to fix the Alternative Minimum Tax, which was enacted in 1969 to make sure rich people pay taxes but was never indexed for inflation, and thus is now hitting middle-income workers.
“In a worst-case scenario, allowing the Bush tax cuts to expire and failing to fix the AMT could result in (1.5 percent) of fiscal drag in 2011 on top of the 1 percent fiscal drag we expect to occur as the Obama fiscal stimulus package unwinds,” Deutsche said in a note to clients. “If the recovery remains soft/tentative through early next year, this additional drag could be enough to push the economy to a stalling point.”
Deutsche compared the situation to Japan in the 1990s, when the government let tax cuts expire and cut stimulus, leading to another leg down in the recession and ensuring the nation’s “lost decade” of no economic growth.
As we continue to debate the impact of the economic stimulus package passed in 2009, and subsequent “jobs bills,” we should look at what Barack Obama’s own economic advisor, Christina Romer, once noted about tax cuts as an effective tool to fight a downturn (emphasis mine):
Underlying the debate is a long-running argument about how much of a lift the government gets from spending more or taxing less. Keynesians argue that when the economy is distressed, a dollar spent by the government multiplies in value. It gives a worker income the private sector has failed to produce, which he spends, creating demand for goods and services.
Ms. Romer argued last year that this “multiplier” for government meant every dollar spent created about $1.50 worth of demand.
Some economists say that’s too high. Valerie Ramey of the University of California at San Diego, initially thinking as a Keynesian, developed doubts after sifting through historical examples. During the military build-ups of World War II, the Korean War and the Reagan era, a dollar spent added roughly a dollar of growth, she says. Although Ms. Ramey supported stimulus in 2009 because the economy was so weak, she doesn’t advocate more now. “We just don’t have enough evidence to prove that it’s good.”
Robert Barro, a Harvard economist, found even smaller multipliers: A government dollar spent creates about 80 cents worth of growth, or possibly less, he says. Government spending, he says, crowds out private sector spending that would otherwise be taking place.
Keynesians say other things were happening at the same time as military build-ups that muddy the results. During World War II, for instance, consumer goods were rationed and Americans were exhorted not to spend.
Rep. Paul Ryan (R-WI) appeared on Hardball on Monday and discussed taxes, the debt and spending cuts with Chris Matthews, who demagogues tax cuts, and wound up giving him a lesson on economics:
As the debate over the extention of the Bush tax cuts heats up, with Obama Administration officials foolishly saying that their expiration will have no impact on a fragile economy, Dan Mitchell points out that the working class, lower and middle income earners, will be causualities of the War on the Rich:
Unfortunately, the Obama Administration’s approach is to look at tax policy only through the prism of class warfare. This means that some tax cuts can be extended, but only if there is no direct benefit to anybody making more than $200,000 or $250,000 per year. The folks at the White House apparently don’t understand, however, that higher direct costs on the “rich” will translate into higher indirect costs on the rest of us. Higher tax rates on work, saving, investment, and entrepreneurship will slow economic growth. And, because of compounding, even small changes in the long-run growth rate can have a significant impact on living standards within one or two decades. This is one of the reasons why high-tax European welfare states have lost ground in recent decades compared to the United States.
As we approach the 2010 mid-terms, some Democrats are calling for an extention of the Bush tax cuts:
Two more Senate Democrats called for extending tax cuts for all earners—including those with the highest incomes—in what appears to be a breakdown of the party’s consensus on the how to handle the expiration of Bush-era tax cuts.
Sen. Kent Conrad (D., N.D.) said in an interview Wednesday that Congress shouldn’t allow taxes on the wealthy to rise until the economy is on a sounder footing.
Sen. Ben Nelson (D., Neb.) said through a spokesman that he also supported extending all the expiring tax cuts for now, adding that he wanted to offset the impact on federal deficits as much as possible.
They are the second and third Senate Democrats to come out publicly in recent days in favor of extending all the tax breaks for the time being. Sen. Evan Bayh (D., Ind.) made similar comments last week.
“As a general rule, you don’t want to be cutting spending or raising taxes in the midst of a downturn,” Mr. Conrad said. “We know that very soon we’ve got to pivot and focus on the deficit. But it probably is too soon to cut spending or raise taxes.”
Speaker Nancy Pelosi (D-CA) is shooting down the idea, insisting that raise taxes at a time when the economy is volatile is somehow good for the economy. And her thinking is exactly why businesses are sitting on a trillion dollars in cash instead of hiring. They’re scared to death.
Extend the tax cuts, and slash spending!
Brian Riedl argues that the tax cuts passed by Congress in 2001 did not cause the runaway deficits we’ve seen over the last several years, but that runaway spending is to blame:
The fact is that rapidly increasing spending will cause 100% of rising long-term deficits. Over the past 50 years, tax revenues have deviated little from their 18% of gross domestic product (GDP) average. Despite a temporary recession-induced dip, CBO projects that even if all Bush tax cuts are extended and the AMT is patched, tax revenues will rebound to 18.2% of GDP by 2020—slightly above the historical average. They will continue growing afterwards.
Spending—which has averaged 20.3% of GDP over the past 50 years—won’t remain as stable. Using the budget baseline deficit of $13 trillion for the next decade as described above, CBO figures show spending surging to a peacetime record 26.5% of GDP by 2020 and also rising steeply thereafter.
Putting this together, the budget deficit, historically 2.3% of GDP, is projected to leap to 8.3% of GDP by 2020 under current policies. This will result from Washington taxing at 0.2% of GDP above the historical average but spending 6.2% above its historical average.
Entitlements and other obligations are driving the deficits. Specifically, Social Security, Medicare, Medicaid and net interest costs are projected to rise by 5.4% of GDP between 2008 and 2020. The Bush tax cuts are a convenient scapegoat for past and future budget woes. But it is the dramatic upward arc of federal spending that is the root of the problem.
Get ready for the largest tax hike in United States’ history:
Suppose instead of passing a tax cut, Congress faced the even more compelling prospect of preventing the largest tax hike the middle class has ever seen. Hitting the middle class with tax hikes is a prescription for political oblivion. Under normal circumstances such a bill would likely pass the House and Senate unanimously, accompanied with enough lofty oration to launch a zeppelin.
Yet facing exactly this prospect with the expiration of the 2001 and 2003 tax cuts at the end of this year, the Democratic leadership in Congress says it intends to wait until after the election to prevent the tax hikes. Why is that? They feign it is because they await the Obama Fiscal Commission report. When will that be? Conveniently, after the election.
House Majority Leader Steny Hoyer (D–MD) has already signaled the Democrats’ intention to hike middle-class taxes eventually. In the meantime, Democrats could easily prevent a tax hike for 2011 and would do so without delay if that was their intention. Instead, by delaying action until after the election, the Democrats have made it clear that they intend to sock America’s middle class with a mighty tax blow—but not in some future year. They intend to deliver the blow in 2011. They just don’t want to tell anyone yet.
Democrats have been laying the ground work for this for some time now. In the middle of a sluggish recovery, the affects of a tax increase will put a strain on individuals, families and businesses, likely throwing the economy off.
Art Laffer is predicting a recession next year, after the Bush tax cuts expire:
On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. President George W. Bush’s tax cuts expire on that date, meaning that the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts.
Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there’s always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.
Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.
The budget submitted by President Barack Obama for FY 2011 contains a tax increase of $1 trillion:
Taxes on high-income earners would rise by nearly $1 trillion over the next 10 years, under the budget plan put forward by President Barack Obama on Monday.
The bulk of that increase comes as tax cuts enacted under President George W. Bush expire at the end of 2010.
The top two income-tax rates, which affect people earning more than $200,000 a year, or $250,000 for married couples, will return to 36% and 39.6%, from 33% and 35% now.
Under the budget plan, capital gains and dividends would be taxed at 20%, up from 15% now, for people at those income levels.
In a time of economic uncertainty, increasing tax rates is asking for more problems. This tax increase by default. Simply by letting the Bush tax cuts expire, will hit small businesses that file individual income tax returns.
When you’re sitting at 10% unemployment, with some economists predicting a worsening of that figure, increasing taxes is the opposite of what the president and leaders in Congress should be doing.
The uber-tax-and-spend-liberal Obama is now on the defensive since being shoved to 2nd place after the nomination of quasi-libertarian Sarah Palin. Whether her nomination had any major effect or not, there is a shift in the Democratic Nominee’s position on taxation. He is sliding back on his promise to immediately attempt to rescind the “Bush Tax Cuts” and is also stating any new tax hikes should be put on hold, pending the current condition of the economy. This is a shift that is layered on top of a previous tax shift concerning subjecting payroll taxes to wealthy Americans, which he now says “should be put off until years down the road, like ten years”.
WASHINGTON (AP) - Democrat Barack Obama says he would delay rescinding President Bush’s tax cuts on wealthy Americans if he becomes the next president and the economy is in a recession, suggesting such an increase would further hurt the economy.