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The Bush tax cuts enacted in 2001 and 2003 were classic supply-side trickle-down economic theory. Give wealthy people more capital by way of tax relief, and they will create economic prosperity for all.
The holes in that theory? It would become more difficult to fund an expensive war. Enormous deficits matter to long-range economic health. Government spending, exacerbated by the war, was not curbed. And the wealthy don’t always use money the way you hope.
If the Bush cuts are rolled back, as Barack Obama suggests, the 0%-to-15% capital gains rate would revert to 20%. Obama would restore the 36% and 39.6% income tax rates, while the wealthiest would also pay the highest capital-gains and dividend taxes. Middle and lower-income taxpayers would still benefit from lower taxes and get relief in other ways, too. Opponents say such moves will hurt the economy.
We needn’t go far back in history to see that such cynicism is empty rhetoric. In 1993, the federal deficit exceeded $300 billion a year. Bill Clinton and Congress raised taxes and slashed spending. The effect: The deficits that had ballooned under Reagan and Bush 41 were tamed, and we had economic expansion, job creation, a stock boom, and a budget surplus when Clinton left office.
Now median wages and benefits, adjusted for inflation, are going nowhere. Health care costs are rising more than 10% a year, and employees must pay more of them since we have no national health care. Since Bush has been in office, new wealth has been concentrated in the wealthiest 1%. Hedge fund billionaires pay a lower tax rate than I do. Before the housing bubble burst, there was job creation. But it was not so much due to the tax cuts but rather consumer spending financed by home equity—expansion funded on the equivalent of credit cards.
Taxing the wealthiest Americans at the rates of the 1990s is not about socialistic income redistribution. It’s about the country having enough money to do the business of the people: defense, health care, decent schools, infrastructure, and Social Security. It’s not “Morning in America” time. It’s “Eat Our Spinach” time in America.
Every Presidential election year, candidates roll out tax plans aimed at wooing voters. This year, one of the debates is whether the Bush tax cuts should be made permanent.
The 2003 tax cuts simplified income tax brackets and slightly lowered rates. Consequently, the income tax’s penalty on work, investment, and innovation was reduced. Eliminating these cuts would be poor economic policy, poor tax policy, and poor social policy.
The long-term capital gains tax rate, now 15%—which will revert to 20% in 2011 if the tax cuts are not made permanent—makes us competitive internationally. This increase would raise the tax on investment gains by a third, increasing the tax from about the world average to one of the world’s highest. This is hardly a formula for domestic investment in job growth.
But these tax cuts don’t just help investors. Families would also see their taxes increase. Half of current child tax credits would disappear, dropping from $1,000 per child to $500. Grandparents could pass on less to their grandchildren, too, because death taxes would also rise.
The federal deficit is certainly a problem, but the culprit is federal spending, not tax rates. Spending is growing twice as fast as the government’s bank account, and twice as fast as it needs to provide services for our growing population. From 2001 to 2008, federal outlays increased at an average annual rate of 3.6%, three times the rate of population growth. And contrary to what some argue, tax revenues did not dry up but rather increased over that period at an average annual rate of 1.4%. The problem isn’t too little revenue but too much spending.
Congress rarely practices spending restraint for the sake of reducing the national debt. Nevertheless, that’s exactly what we need.
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