Congress to Consider Extension of Bush Tax Cuts
The Senate Finance Committee met recently to begin discussing the extension of the Bush tax cuts. President Obama and Democratic leaders have made it known that they intend to let the Bush tax cuts expire and instead implement a policy that increases taxes for those making over $250,000 per year. Republicans and several Senate Democrats, including Evan Bayh (D-IN) and Kent Conrad (D-ND), contend that it would be unwise to increase taxes during a time of economic tumult. Senators Bayh and Conrad see that raising taxes on the highest earners would be bad for economic recovery. When Congress returns from its summer recess in September, this issue will be on the forefront of its legislative agenda, and tax cuts will figure prominently in this year’s midterm elections. Furthermore, if the Obama administration fails to renew the Bush tax cuts, we will probably also see a titanic enlargement of the capital gains tax, the estate tax, federal income tax, and a correspondingly large decrease in consumer spending. The renewal of the Bush tax cuts is a critical necessity.
In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act, instituting the largest tax cut since 1981. Through the passage of this legislation, President Bush’s proposed $1.35 trillion tax cut became reality. The Bush tax cuts of 2001 spawned economic growth in a myriad of ways. First, the drastic lessening of the U.S. federal income tax brackets—from 15, 28, 31, 36, and 39.6 percent, to 10, 15, 25, 28, 33 and 35 percent—enhanced consumer confidence and grew the economy. David Herzenhorn, in a recent New York Times article, entitled, “Battle Looms in Washington Over Expiring Tax Cuts,” argued that if Congress fails to renew the Bush tax cuts, the tax hike would have disastrous effects on economic productivity and consumer spending. Henzenhorn and a few other leading Democrats recognize that a significant tax increase on the nation’s highest earners will lead to greater economic decline and prolong the recession.
Aside from fostering greater economic prosperity, the core objective of the Bush tax cuts was to ensure that American citizens would be able to retain more of their own money. It was Bush’s hope that this money would be used to stimulate what was, at the time, a beleaguered economy. Importantly, the law phased in a substantial decrease in the estate tax—even suspending it entirely for 2010.
The estate tax is owed on one’s assets or estate after one has perished. An increase in the estate tax puts a terrific burden on the benefactor’s family. Renowned economists Arthur Laffer and Stephen Moore, in their seminal new tome, Return to Prosperity: How America Can Regain its Economic Superpower Status, note that President Obama intends to reinstate, rather than eliminate, the estate tax. As aforementioned, the estate tax is currently at zero; by reinstating the tax, it will return to a staggering 55% on all estates worth over $3.5 million. An increase in the estate tax equates to less investment and denigration of U.S. economic growth and productivity. For the sake of American fiscal and economic stability, it is of paramount importance that the estate tax is eradicated.
President Bush and the Republican Congress, in an effort to minimize the severity of one of the worst economic recessions in American history, passed a second tax cut in early 2003. The Jobs Growth and Tax Relief Reconciliation Act of 2003 initiated a tax cut of $550 billion on top of the earlier $1.35 trillion tax cut of 2001. Upon the passage of this second tax cut, the American economy soared to new heights. In fact, from 2003-2008, America witnessed its greatest economic expansion since the presidency of Theodore Roosevelt.
The 2003 tax cuts comprised a plethora of decisive features. First, the Bush tax cuts provided a significant income tax reduction for married couples. Second, the 2003 tax cut nearly doubled the child tax credit, from $600 to $1,000 per child. Third, the tax cut ended the longstanding problem of double-taxation of income and investments. Partly as a result, the stock market and 401K plans saw an astronomical increase almost immediately: in October 2006, the Dow Jones Industrial Average reached its pinnacle by exceeding 15,000 points. Additionally, the capital gains tax rate was reduced from 20% to 15%. But President Obama has made it clear on numerous occasions that he rejects the logic that produced such important gains and that he is poised to increase the capital gains tax rate from 15% all the way to an atrocious 30%.
One of the common misnomers about tax cuts is that they benefit only the wealthiest citizens. Much to the chagrin of President Obama and Congressional liberals, the argument that the Bush tax cuts only benefited the “wealthiest 1%” is erroneous. In fact, the non-partisan Bureau of Labor statistics notes that nearly 92 million taxpayers received a tax cut of $1,083 in FY 2003. That number has increased in recent years due to the framework of the legislation, which anticipated inflation. Moreover, 46 million married couples received an average tax cut of $1,716. Furthermore, 34 million families with children received a tax cut of nearly $1,473. What liberal pundits, polemicists, and politicians neglect to cite is that the most affluent Americans received substantially less money from the 2003 tax cuts than their lower and middle class brethren, and ultimately ended up paying more money in taxes than the year prior. Moore and Laffer explain, “In 2005, the percentage of income taxes (which included dividends and capital gains) paid by the richest one percent hit an all time high of 39 percent. The top five percent paid nearly 60 percent of their income tax, close to an all-time record.” As these statistics indicate, the 2003 Bush tax cuts benefited lower and middle income citizens more than those of greater financial means. Allowing the Bush tax cuts to expire would weaken the financial stability of middle-class Americans, deter consumer confidence, and prolong our economic recession.
The National section of the Weekly Political Forecast is authored by PAI’s Political Analyst.
