Congress Should Allow Bush Tax Cuts to Expire
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An event of great importance to the American people will occur on December 31, 2010. At the end of this year the tax reductions put in place during the Bush Administration will expire. Without approval by Congress to extend the tax reductions, the top personal income tax rate will climb from 35% to 39.6%, and the federal tax on dividends will increase from 15% to 39.6%. This event is not of great importance because it imposes a slightly higher tax burden on those that are relatively well-off; it is of great importance because the American people will be given an opportunity to choose fiscal responsibility over runaway deficit spending. For a country that has become addicted to living ( and fighting its wars) with borrowed money this will not be an easy decision.
Most economists will agree that raising tax rates, especially on the top earners, will reduce the incentives for growth. The theory is that a relatively low tax rate on dividends will motivate investors to put their money into job-creating enterprises that will, in turn, pay out dividends, and provide them with a low-taxed source of income. Many Centrist Democrats and Republicans see the continuation of tax reductions on dividend income as a key factor in helping to pull America out of the current economic recession, and instrumental in the creation of new jobs. The principle of providing rewards for the wealthy, as an incentive for economic growth and job creation for the middle class is the essence of “trickle-down” economics. The results of the Bush tax cuts and the “trickle-down” economics that were put into play in 2001 and 2003, are an estimated $300 billion yearly reduction in tax revenues, an unemployment rate nearing ten percent, and a national debt of almost $8 trillion. Although the Bush tax cuts may have, in fact, helped to boost investment and create jobs in the past, they have greatly reduced the ability of the federal government to provide vital services without borrowing the funds from foreigners.
Although no-one looks forward to paying higher taxes to the federal government, we Americans have all created (over time) a social welfare system that has become more costly than anyone would have imagined. The funding requirements of Social Security, Medicare, unemployment compensation, etc. cannot be ignored by allowing the well-off citizens of America to continue to underpay their taxes by claiming a lower rate on “dividend income”. Both dividend income and earned income must be treated equally, and the marginal tax rate must be adjusted upward until government deficits are significantly reduced. Congress will soon be given the unique opportunity to do something about reducing America’s skyrocketing national debt. Let’s hope that they show the courage to set a new course of fiscal responsibility, rather than extending the tax cuts that have helped America to become the largest debtor nation in the world.
Rich
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The interesting (economically speaking) thing about the Great Recession is that it barely hurt the profits of the top 1%, now even with shrinking demand the top 1% are making more money than ever. Where the few investment dollars are going is into automated systems.
Ford is making as many cars in the US as they ever had, but they are doing it with half as many workers. The idea “any” money that the top 1% is saving in taxes goes into job creation is clearly false. It is being invested in job destruction.
That’s not totally bad as more efficient industries have the potential for more wealth creation, but it must be balanced by the creation of new industries. Something the federal government does very well.
Increasing the taxes on the top 1% will have the effect of slowing down the investment into job destroying technologies and make investment into job creating technologies as money spent on workers is not taxed.
What worries me is that the rich continues to get richer. The top guy for BP, who is stepping down, is going to be getting a ton of money to do so with his pension. It just doesn’t seem all that fair when he did a sub-par job.
However, tax cuts for the wealthy just doesn’t seem to make sense. I’m not in the accounting business, nor do I really know how they break down the tax brackets, but, wouldn’t it just make sense to tax people based on income? Clear across the board? That way it doesn’t seem unfair to any party involved?
All I know is there’s money taken out of my pay check every two weeks, and in the spring I get a chunk of money back. What they do with that money I have no idea. And I probably wouldn’t like it if I knew.
Project,
I never bought into the idea that tax reductions for the wealthy would “trickle down” into jobs for the middle class. Those with resources will always put their money where it will create wealth for themselves, and not middle class Americans. Frankly, I don’t blame the wealthy for taking advantage of the Bush tax cuts to made more money for themselves; it is the rational thing to do. However, I do blame the Republicans for giving in to the moneyed special interests to get these tax reductions pushed though in the first place.
Cassie,
Sometime back in 2001 and 2003 the Bush Administration, along with the Republicans in Congress, decided that cutting taxes for the wealthy would stimulate economic growth and benefit the middle class through job creation. This has not been proven to be true. As you said, we need to get back to the concept where everyone pays taxes according to how much they earn, be it dividends or ordinary income.
By the way, you only get money back from the Treasury every Spring because you are over-paying your taxes throughout the year.
Well, I do agree that an event of great importance to the American people will occur on December 31, 2010. And it will hit the economy like a hurricane: Taxes will go up for all LLC’s, sub-S corporations, and those that file under the individual tax as partnerships for small and mid-sized businesses. Businesses will continue to hunker down and delay hiring while the American economy will continue to be lackluster.
Everyone knows that the more you tax something, the less of that thing you will get. The more you tax gasoline, the less driving people will do. The more you tax cigarettes, the less smoking people will do. The same applies to investment. When taxes on dividend income and capital gains rise, the less capital investment there will be and less jobs will be the result.
The Obama administration and liberal Democrats have painted themselves into a corner—they vigorously demonized everything George Bush did and blamed all the ills of the economy on his tax cuts. Now they have run out of fiscal tools to get the economy moving again. Evoking the short term Philips Curve has failed—low interest rates have not increased aggregate demand enough to spur employment growth, the massive porkulus bill was a political payoff that has had poor results. Now what? Well, the administration is going for broke and hoping for a miracle by raising taxes on businesses and the investor’s that create them. This is called “political suicide” and it will be a slow and painful process for everyone other than those pulling the switch. They will tell us that this is just the medicine we need and celebrate economic “success” while the country falters.
After the internet bubble popped and the tragedy of 9/11, the Bush tax cuts got the economy moving again and the headline unemployment rate stayed under 6% for 5 years (under 5% for 2 years). We’ll see what a tax hike does sure enough.
VH,
I certainly agree that the more you tax something, the less of that thing you will get. I am not in favor of higher taxes, but I am in favor of balancing the national budget. For many, many years the people of the United States (through Congress)have inflated the national budget with, Social Security, Medicare, unemployment comp, unnecessary wars and lots of other things. Bush got it wrong when he pushed through tax cuts that helped to make it impossible to pay for all the programs that the people of the United States had enacted. What Earthly good does it do to stick our heads in the sand, continue to pretend that the tax cuts for the wealthy will produce jobs, and continue to live above our means with money borrowed from foreigners?
The surest way to impoverish America is to create run-away inflation by driving our national debt through the roof. At first, the wealthy will do just fine, because they can always find a hedge against inflation. In the meantime we will create for ourselves a third-world country, where there are two classes of people; the wealthy and the dirt poor. The middle class will simply disappear.