Solving the Bush Tax Cuts

September 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.

Treasury Secretary Tim GeithnerLet’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.

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8 Responses to “Solving the Bush Tax Cuts”

  1. Bobby Says:

    While I agree with much of what you’ve said, I’m surprised that you’re in favor of tax increases.

  2. Ralphie Says:

    Glad i waited until Bobby waded in because he reinforces the point i want to make. Thanks for the new blog post Lee.

    First what i agree on – we should cut expenses, especially whatever the hell isnt working – always. Im also fine with a gradual escalation of the tax rate on the rich back to pre-Bush levels, as a political answer.

    Going back to the origin of Bush’s ‘tax cut for the rich’, it was something that at the time was ill advised as we were heading into the Irag War and running ever higher budget deficits. Even John McCain and other ‘moderate’ Republicans were against this tax cut. His own Treasury Secretary Paul O Neil – certainly not a Democrat – was internally against this tax cut as he wrote about in his book ‘The Price of Loyalty’
    http://www.cbsnews.com/stories/2004/01/09/60minutes/main592330.shtml.

    Just as soon as the tax cut passed, karl rove and the republican script readers on capital hill all IMMEDIATELY started referring to any repeal of this just moments-ago passed tax cut for the rich as a “TAX INCREASE”. That phrase has been the main talking point against its repeal since then, and everyone forgets how it was rammed through and highly controversial and ill-advised when it did pass.

    All these years later, economists have concluded that this tax cut didnt even create all that many jobs! Alan Greenspan famously said just a few months ago that it was fiduciarily irresponsible not to let that tax cut expire given our dire financial position as a country.

    The fact is our country did just fine with that tax rate where it was during Clinton’s years and our country doesnt have a choice but to raise revenue. You fail to put enough of an urgency on that Lee. Everyone including you continue to promote the keynsian argument that if you just give rich people money, they will pee money on the lesser people and create jobs. Do we have time for that? That really didnt prove to be the case. I do see tax cuts for small businesses, who have the fire in the belly to grow bigger, working well. and being part of the answer out of our abyss. For some reason republicans fight tax cuts for small businesses, i guess because they are paid to make the small businesses slaves to the big businesses.

    The health of our economy has more to do with macro business opportunity and access to capital, which brings us to your second point about banks.

    Banks are the problem right now, not businesses. When a banker tells you ‘we just cant find customers to pay us back’, thats a crock. Thats they excuse they are giving for not helping our economy get back on its feet.

    Banks screwed up, got greedy, poisoned themselves with stupid and illegal gimmicks, and lost a shit load of money. The banking collapse substantially weakened the economy and confidence of the economy. Then those guys stopped lending money.

    Both this blog and the republican share a talking point in referring to the ‘uncertainty’ in the business community. People know what Obama believes in and they need adjust accordingly. Just like people knew precisely what Bush and Cheney stood for (read the Paul Oneil article) and had to adjust accordingly. But no worries, there are enough sold-out Dems and Moderate Republicans to keep things from going to far one direction or another.

  3. Ralphie Says:

    Lee and Bobby, i would love your thoughts on this article that just came out on the data behind the bush tax cut:
    http://www.tax.com/taxcom/taxblog.nsf/Permalink/CHAS-89LPZ9?OpenDocument

  4. Lee Eldridge Says:

    Hey Bobby and Ralphie.

    Bobby — it’s not that I favor higher taxes, but to me, this seems like a reasonable solution. The left gets the higher taxes they want, the moderates get to postpone the increases, and the right gets their cuts in spending, and all tax rates become permanent. And while I believe that tax increases are never good for the economy, I think the positives of decreasing government spending FAR outweigh the negatives of the tax increases on the rich.

    Ralphie — so it sounds like we’ve found a little common ground here. Not bad for a Saturday 🙂

    While in a broad sense I favor lower taxes and limited government, I don’t believe I’ve ever defended the Bush tax cuts. Candidate Bush ran on tax cuts because we had budget surpluses. President Bush pushed for the same tax policy / tax cuts to spur on the economy during the last recession. I always found the argument flawed. I have defended Reagan’s tax cuts because he lowered taxes on all Americans, and tax revenues continued to grow. But it’s illogical to think that you can continue to push tax rates towards 0 and continue to grow tax revenues as the republicans would like us to believe.

    It would also be my preference NOT to use tax policy to try to stimulate the economy. But that’s a discussion for another day.

    You also seem to place the majority of the blame on the banks for our current economic problems. My belief is that the government shares equally in the blame, especially in regards to the real estate / mortgage crisis.

    And urgency? I’ve been talking about budget deficits and national debt for a long time. Long before I started this blog. And it’s certainly been a fairly consistent theme in my writing. I guess I could use ALL CAPITAL LETTERS more to create that sense of urgency when I discuss the DANGERS of HUGE DEFICITS and a BALLOONING NATIONAL DEBT!!!

    🙂

  5. ralphie Says:

    So what did you think of the article on tax.com? I think it makes a great argument that big business is really just trying to scare everyone when they say things like ‘uncertainty’ and ‘this will hurt jobs’. The empirical data simply doesnt back that up and beyond that, the govertment would have almost 3 Trillion dollars extra in the bank if GW hadnt of imprudently offered up that tax break to folks that certainly earned the money they make, but didnt need the tax break then or now. You know Lee, i just find it funny that Republicans are suppossed to be the party of the boardroom yet they are SO oppossed to taking sober measures to get our checkboard in order. Everything has to be filtered through a corporate giveaway (welfare – republican style).

  6. Lee Eldridge Says:

    Good morning Ralphie. A couple quick comments about the article, and the Bush tax cuts.

    The justification to return to higher tax rates by many on the left is because things were so great during the ’90s, as if it was the tax rates of the ’90s that CREATED the strong economy. I disagree with this conclusion vehemently. It’s flawed thinking not to consider outside influences. And it’s a flawed recollection of what happened in the ’90s.

    The article seems to ONLY take tax policy into account. But tax policy does not live in a vacuum. During the last ten years we’ve had to deal with two recessions, the 9-11 attack (very detrimental to our economy), two wars and a federal government that has grown more quickly than tax revenues have grown. And that doesn’t take into account the shift in our country from a country that actually produces products, to a country that is based off a more service oriented approach, which will continue to cause us economic problems in the future. We don’t produce anything any more, and that’s a problem for us moving forward.

    It also fails to consider what caused our economic boom of the ’90s. It was not our tax rates that created the strong economy. Investment in business during the ’80s and early ’90s is what put us in a strong economic position by the mid ’90s — partially a result of the Reagan tax cuts. A focus on fiscal discipline and limited government growth during the mid ’90s contributed as well. The .com bubble spurred on the markets. And the real estate bubble, which the government bears a significant responsibility in creating, was in the middle of the boom as well.

    My opinion is that the .com bubble inflated market value significantly, and the housing bubble inflated just about everything else. Personally, I think much of the ’90s boom was a mirage — much of that wealth was only on paper, and never really existed. The recession at the beginning of Bush’s first term was a partial correction of inflated real estate values, but only partial. The housing bubble remained, and did not fully correct until this last recession.

    I remember Bush in 2001 or 2002 bringing out a plan to limit government growth to 4% per year. I was against the plan because even then my opinion was that the federal government was too big. But when Bush presented this plan to the moderates in control of Congress at the time, they basically scoffed at him. They began to grow the government at a faster pace than what the conservatives had done during the ’90s.

    Did the Bush tax cuts give us a thriving economy? Absolutely not. Did the tax cuts help pull us out of the last recession? Yes, they probably did. But in my opinion, cutting taxes and GROWING the government is the wrong approach.

    Cutting taxes and REDUCING the size of the federal government is the correct approach.

    And to be clear, our tax policy in this country is a piece of crap. The entire system needs to be junked. I’ve got a plan for that, but it I’m not ready to announce it yet 🙂 You’ll just have to keep reading to find out what the Eldridge Tax Plan is all about!

  7. Bobby Says:

    Ralphie sure hates the banks.

    To think that banks are refusing to lend money to stick it to us poor Americans is pathetic left-wing bullshit. Banks are IN BUSINESS to lend money.

    And besides, how many business leaders do you hear complaining about not being able to borrow money? Not very many. Businesses are afraid to borrow because they don’t see opportunities in this economy to grow their business, and to make money from the money they borrow. They’re all still hunkered down trying to wait it out.

  8. Lee Eldridge Says:

    Bobby, I see that same mentality a lot here in Lawrence. Corporate America / big business is bad and the root of all evil. At least all evil that can’t be directly attributed to GWB and all those evil bastards on the right.

    A couple years ago we got a deal from Sam’s where we were able to offer discounted memberships to our employees. Didn’t cost us anything. So we announced it to the staff. Had an employee come into my office and give me a 15 minute lecture on how evil Sam’s / Walmart is, and all the bad things they do, and that we shouldn’t be partnering with such an evil corporation.

    Now Walmart has made mistakes over the years. My point isn’t to say that corruption doesn’t exist. And that greed doesn’t exist. Sure it does. But I’ve also seen Walmart do many very positive things in their communities. I have family who work in the corporate offices in Arkansas, and have seen firsthand the positive things they do.

    Same thing with banks. I have a number of friends who work in the banking industry, and who work for local banks. When Ralphie accuses the banks and says “Then those guys stopped lending money” as if they’re deliberately sabotaging the economy, it shows more about Ralphie’s mindset than it does an understanding of what’s going on in the banking industry.