Solving the Bush Tax CutsSeptember 25th, 2010 by Lee Eldridge
As you know, the Bush tax cuts are set to expire at the end of the year, and it doesn’t appear that Congress is in any hurry to bring this to a vote. Why? Because Pelosi and Reid don’t have enough votes to achieve their desired outcome — increasing taxes on the rich. What’s most disappointing is that this is really an opportunity for Congress to do something right, and they’re not going to do it.
What we see are three positions on the Bush Tax Cuts. The administration and the left would like to extend the tax cuts except at the highest tax rates, ultimately increasing taxes on the “rich” now. (I love the rebranding, where Pelosi is calling this the Obama Middle Class Tax Cuts.) The moderate democrats, who ultimately would also like to increase taxes on the rich, understand that increasing taxes on anybody during a down economy is a bad idea. They would like to postpone the higher tax rates on the rich until the economy is back on its feat. And of course the right will fight all tax increases.
Let’s start with a couple of quotes from Treasury Secretary Tim Geithner, who has attempted to make the case that a failure to raise taxes on the rich now will harm economic growth.
In a speech to the Center for American Progress: “Others have suggested we delay, by extending all Bush tax cuts temporarily, for a year or two. But the world is likely to view any temporary extension of the income tax cuts for the top two percent as a prelude to a long term or permanent extension. That would hurt economic recovery by undermining confidence that we are prepared to make a commitment today to bring down our future deficits.”
On “This Week” on ABC, he said, “We think that’s the responsible thing to do (letting tax cuts expire on the highest income brackets) because we need to make sure we can show the world” that America is “willing as a country now to start to make some progress bringing down our long-term deficits.” Mr. Geithner added, “I do not believe it will affect growth.”
Let me say this very simply so that even Mr. Geithner can understand: Raising taxes will NEVER benefit the economy, and WILL negatively affect growth.
Uncertainty is the Problem
What Geithner fails to understand is the real problem — uncertainty. Consumers do not like uncertainty. Business people do not like uncertainty. The markets do not like uncertainty. And the economy does not like uncertainty. What do we have right now? A whole bunch of uncertainty.
What is creating the uncertainty? Huge budget deficits as far as the eye can see, and a ballooning national debt. The economy understands that if the federal government fails to control its spending, there is only one solution — massive tax increases on everybody. You cannot tax the rich enough to solve this problem. You cannot tax businesses enough to solve this problem. And when you tax businesses, it’s ultimately the consumers that bare the financial burden anyway. Taxing business IS a tax on all Americans, rich and poor alike.
So how do you solve the problem of uncertainty? Show that you’re willing to make the tough budget choices that will limit government growth, and create fiscal discipline.
Just Stop It
I’m tired of the right pretending that tax cuts are the panacea to all of our problems. What makes 35% the magic tax rate and everything higher is wrong? And I’m tired of the left playing class warfare and their soak the rich mentality. They say that the only way to fix our budget shortcomings is to raise taxes. Well I have a simple suggestion for you: CUT SPENDING!
The Art of Negotiation
Here is where I say that Congress has an opportunity to do what’s right for the American people, and our economy. There’s a solution to all of this. And it’s really not that hard to understand.
1. To get the moderate democrats onboard, what you do is ask for a slow escalation of the top tax rates. For instance, leave the tax rate as is in 2011, and then increase the top bracket by a small amount each year over the next five years until you reach 39.6%. And then make them all permanent. By doing this, you have removed one piece of uncertainty. Businesses can now make long-term plans because they understand what their tax consequences will be. But this is not enough to create a more stable future.
2. If you want to get republicans onboard, and decrease economic uncertainty, you must cut spending. This is called “compromise”. Candidate Obama said that he would cut spending on government programs that don’t work. Well it’s time for some cuts. They’ve had a year and a half to evaluate these programs. As a first step, the administration and Congress must identify several dozen programs that do not deserve federal funding. And during this same time period where we’re slowly escalating the tax rate on the highest tax bracket, we reduce funding to these ineffective programs by 20% per year, until all funding is cut to these programs. And the goal needs to be significant, such as $500 billion in cuts per year.
Now you’ve shown the economy that you’re truly interested in fixing our budget problems.
The Tax System and Budgets
Now let me also explain that all of this is still only a band-aid. And it’s not the long-term solution we need. But it’s a step in the right direction. Manipulations of our current tax code is like attempting to make chicken salad out of chicken shit. We need a COMPLETE overhaul of our tax system. And a COMPLETE overhaul of our budget. But these solutions will need to wait for another day. Today, let’s just do what’s right.