Deficits, Dollar, Federal Reserve, Game Theory, Individual v. Collective, Live and Learn, Taxes, Treasury

What Should be Done About the Bush Tax Cuts?

There is a lot of chatter going on about the Bush tax cuts. The issue is whether to extend them, and for whom. The Obama administration wants to extend the tax cuts for those making under $200,000 per year adjusted gross income (AGI), and households (joint filers) making under $250,000 AGI. They want to let the tax cuts expire for everyone earning above that threshold. Senate Democrats have delayed the contentious vote until after elections, during the lame-duck session in November (not unlike the vote for H.R. 4646 which would institute a new 1% tax on any transaction using a payment instrument). It’s probably fairly safe to assume this vote was delayed for political expediency purposes. Incumbents battling tight races will be granted a reprieve on voting to increase taxes; not always a great taste left in your constituency’s mouth prior to entering the voting booth.

The administration wants wealthier Americans to help reduce the debt. It seems fair, but those people probably have been producers bringing in tax revenue all of this time, not government officials spending money.

In response to deficit hawks, President Obama framed the Bush tax cut debate like so:

“You can’t have Republicans running on fiscal discipline that we’re gonna reduce our deficit, that the debt’s out of control, and then borrow tens, hundreds of billions of dollars to give tax cuts to people who don’t need them.”

Then, White House Press Secretary Robert Gibbs chimed in later that afternoon:

“You can’t be for cutting spending and then add $700 billion to the deficit.”

Well, actually you can. We have a problem spending too much, not taxing too little.

I think the Bush tax cuts should be extended for everyone. The government probably feels as though leaving the Bush tax cuts in place for those making under $200-250K is okay, because that group spends all of their income anyway, thus stimulating our consumption-based economy. Those making more than $250K are the ones who have money left over for saving or investment, so the government wants to capture some of that through taxation.

Of course extending the Bush tax cuts would require a reduction in government spending. What is so difficult about reducing government 5% across the board one year, and another 5% across the board a second year, and so on? Programs and agencies can find savings if forced to. And, frankly, there’s no way that we need all of them anyway. Nobody reasonably believes the government NEEDS to be as big as they are. This is why many citizens have determined much of the government is unnecessary, and are desperately seeking for some check and balance, one which really hasn’t been present on bloated government for decades. The public sector shouldn’t be growing on the backs of taxpayers while the private sector contracts, and deals with the pain. We need to do something other than attempt to stimulate the economy with spending.

Warren Buffet, “the Oracle from Omaha”, believes he should pay a greater share of the taxes, and specifically backed allowing the Bush tax cuts to expire for “people in the high income levels”. By all means, Warren, send in whatever you think is fair. We all would appreciate it. But how does that create growth and jobs in our teetering economy? Not to single the Berkshire Hathaway legend out; many people feel this way, he just happens to be of note given his wealth.

I’d be more on board with allowing the Bush tax cuts to expire for those making over $200-250K if there wasn’t an 18.9% underemployment rate and banks were lending. It is simply unacceptable. People aren’t getting the credit they need for businesses. The mortgage modification programs, by both banks and the government, have not been flexible enough, or made drastic enough modifications. The banks that were “too big to fail” are flush with cash while the loan delinquency rate has gone down. They should be lending, particularly since they’ve managed to pass most of the costs of their poor decisions to others.

Taxes take away from savings and investment. Obama’s policies seem to mostly focus on increasing consumer spending or government spending. We need savings, investment, and production if we’re serious about tackling the underemployment problem. Why don’t we have corporate tax rates that are competitive with other countries? The federal corporate tax rate ranges from 15-35%, with state corporate taxes ranging from 0-12%. Taxing people who create jobs isn’t a good idea, if the goal is to reduce unemployment. Particularly in an economy that remains very fearful. Taxes of any stripe take away from capital formation.

Let’s say that consumption was the answer. Where does money for consuming come from? Jobs, rising incomes, and savings. With underemployment, cut compensation, net worth 50-75% what it was, and virtually no savings, how can we consume the economy forward? And what are we consuming? Generally products made abroad, increasing the trade deficit.

Taxation, at some point, becomes immoral, and playing class warfare is never a good idea, let alone fair. Of course some taxation is necessary. I advocate a Fair Tax, and would be open to other ideas which scrapped the 70,000+ pages of inefficiency and lunacy we currently have. There are serious structural problems that no one seems to want to address. Increasing consumption and government spending, while relatively ignoring savings and investment, is unwise.

Money goes where the perceived best opportunities are. Taxes and regulations definitely play into that equation. This isn’t a huge problem when underemployment is 7% and we’re riding bubbles. But when it’s 18.9% and the economy is trying to reset to some equilibrium, it needs to be addressed.

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3 thoughts on “What Should be Done About the Bush Tax Cuts?

    • The Bush tax cuts were passed primarily in 2001 and 2003 i.e. long before the underemployment problems. We have underemployment because we’ve been in a recession/sluggish economy. The recession hit due to expansive monetary policy, the credit boom, underwriting practices, mortgage rate policy at Fannie/Freddie, corrupt rating agencies, bundling of toxic securities, moral hazard, and the subsequent government response to prop up the economy. The response has only socialized the costs of the bubble and continued the original problems of quantitative easing, artificially low interest rates, moral hazard, and debt. We seem to think we’re going to get out of this without shoring up all of our balance sheets: personal, corporate, and government.

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