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The problem with the Bush tax cuts
Posted By Dan Mangru On 07/29/2010 @ 10:20 pm In Commentary,Money | Comments Disabled
The Holy Grail. In Christian theology, the Holy Grail, or the cup of Christ, is a revered and sacred object that is thought to posses miraculous healing powers. It is thought that he who drinks of the cup of Christ shall have all illnesses cured and shall have the grace of God to live forever.
Sadly, the Republican Party has adopted its own Holy Grail, the Bush tax cuts. Why, even the mention of anything even remotely critical of the Bush tax cuts will bring you ridicule in Republican circles. In their eyes, the Bush tax cuts could do no wrong, and the Bush tax cuts are the model for cutting taxes.
The Bush tax cuts can cure all of the illnesses of the economy. In the eyes of Republican politicians, the Bush tax cuts, as-is with no changes, should last forever.
What the Republicans, and the Democrats for that matter, don’t get is that parties go wrong when they support people and not principles.
Political parties forget that elected officials are but flawed human beings capable of being motivated by greed and self-interest. Those forces can cause well-meaning people to make poor decisions on behalf of the people.
When political parties support principles, they stay consistent over time and work towards achieving a shared goal. Remember people change, principles don’t.
Republicans feel the need to support the “Bush” tax cuts because showing anything but support for the “Bush” tax cuts would mean that they were wrong for supporting it.
The fact is George W. Bush and his administration cleverly skirted around or manipulated the rules and principles set forth for making tax cuts.
Under the conservative principles of lower taxes and smaller government, Ronald Reagan enacted the Balanced Budget and Emergency Deficit Control Act of 1985.
Under this act, all tax cuts are subject to a “pay-as-you-go” requirement. What this means is that all tax cuts had to be offset by a corresponding cut in spending.
One of the ways that the Bush administration was able to get around the pay-as-you-go requirement was by putting sunset clauses on all of the tax cuts. In addition, this also helped him garner additional support for the bill.
While Bush thought that he was being clever, he was actually setting up himself, and the country, for disaster.
According to the Center on Budget and Policy Priorities, even with the poor economy from 2001 to 2008, the federal government would have budget surpluses every year during that period, a total of $2 trillion, if Bush had complied with the law of pay-as-you-go and conservative principles of lower taxes and smaller government (meaning less government spending).
To me that assertion is astounding. Even with the dotcom crash and Sept. 11, the literal destruction of a great deal of the New York financial industry infrastructure, the United States would have run surpluses if we just stuck to our principles and didn’t try to finagle around the rules.
Before Bush took office, the Congressional Budget Office estimated that the U.S. would have some $3.5 trillion of budget surplus for fiscal years 2001-2008. The actual number ended up being deficits of $2 trillion.
That’s a $5.5 trillion swing. When we began the decade, we had hopes of paying off the national debt by 2010. Now that goal is nowhere in sight.
To add insult to injury Bush decided to raise spending significantly during his term. The tax cuts along with defense spending increases (which were not offset by budget cuts in other areas) cost nearly $3.4 trillion from 2001 to 2008 and were responsible for four-fifths of the fiscal deterioration that policy changes caused during that period, according to the Center on Budget and Policy Priorities.
Now let’s talk about the loophole Bush used to get the tax cuts enacted. Legally the tax cuts were not permanent changes to the tax code, they were simply “temporary measures.” These temporary measures weren’t subject to the pay-as-you-go requirement.
What Bush figured was that since the 10-year outlook for the economy was good he would make the tax cuts temporary for 10 years and, by that time, people would be so used to them that they would not want to give them up.
Part of that thinking is true. Once someone pays 15 percent capital-gains tax, why would he want to go back to paying 20 percent?
However clever schemes don’t always account for unintended circumstances.
What Bush didn’t calculate was that artificially low interest rates and expanded credit created the biggest bubble in history, and that, by 2010, the U.S. would have a Democrat-controlled Congress facing a midterm election that is too afraid to touch the issue of tax cuts one way or the other.
With the Democrats in control of Congress, there is a good chance that the Bush tax cuts will expire, which will have the net effect of raising taxes on wages, capital gains and dividends, resurrecting a 55-percent death tax and bringing the alternative minimum tax to 21 million American taxpayers.
Raising taxes during a depression, as most economists including Federal Reserve Chairman Ben Bernanke will tell you, is not a good thing. It hurts the economy.
Those same economists will also tell you that cutting spending during a recession has a similar negative effect on the economy as well.
So what is a Congress to do?
Congress has to make tough choices. Whether they like it or not, they are stuck with the Bush tax cuts. Not extending them has more disastrous consequences, both financial and political, than extending them. What Congress has to realize is that there is a law that was set forth during the era of Ronald Reagan called pay-as-you-go.
As the old saying goes, “pay as you go and you’ll never owe.” If the Bush tax cuts are to be extended for two years or 10 years, they must be accompanied by offsetting cuts in spending.
This may hurt in the short run. With less government spending, including less entitlement and so-called “stimulus,” people will feel a short-term slowdown in the economy as the government stops “priming the pump.”
Long-term the benefits far outweigh the costs. As the U.S. curtails its own federal spending, we are putting ourselves back to a path of financial solvency. It’s a basic premise, if you spend less of your money, you end up keeping more.
Also keeping the tax cuts will provide economic stability and keep incentives to make money and do business in America as opposed to somewhere else.
In the long run, that helps grow our tax base, which combined with lower spending makes the tax burden lower for us all and gives us a real shot at someday paying down the deficit.
In science class, we were taught that the best answer to a problem is usually the simplest. We learned that complicated answers usually have too many contingencies and too many ways in which they don’t work.
Sadly, they don’t teach this in government class. Sadly, this wasn’t taught to George W. Bush.
If only Washington, D.C., politicians knew “pay as you go and you’ll never owe,” we wouldn’t be in this mess. Maybe, it’s just that simple.
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