One of the worst habits of our political class is to piece together patchwork economic maneuvers in lieu of solid, stable policies that lay the groundwork for long-term prosperity. Nowhere is this inclination more troubling, or more damaging to our economic well-being, than in the area of taxes.
And as a result, we are staring down the barrel of the most massive tax increase in the history of this nation – a series of scheduled rate hikes that will explode Americans’ annual tax liabilities to the tune of nearly $500 billion. This will be the result of the 2001 and 2003 Bush tax cuts expiring, plus the expiration of the temporary payroll tax cut President Obama put in place in 2010 and later extended, and the onset of many of the tax increases associated with Obamacare (assuming the Supreme Court has allowed these parts of the law to stand).
How serious is this? A new report from the American Council for Capital Formation estimates that the combination of the Bush tax cut expiration and other scheduled measures will cause the economy to lose $855 billion from the gross domestic product. If you think the meager 2 percent growth we’ve been having lately is bad – and it is – what do you think will happen when the economy recedes by 5 or 6 percent in 2013?
The economy will lose 1 million jobs next year, and up to 3 million in 2014. Consumer spending will decrease by $1 trillion. The so-called Great Recession will hardly be remembered in the history books if this monstrosity is allowed to kick in.
This horrible outcome is not set in stone. There is every chance that Congress and President Obama will take action to forestall this massive tax increase. They faced the expiration of the Bush tax cuts in 2010, and they came up with a last-minute deal to extend them to the end of this year.
But the likely issue is not whether they will do something. Rather, it is whether what they do will make any sense. Their recent history, particularly the last-minute 2010 deal, does not inspire confidence.
For one thing, President Obama has shown little interest in extending the Bush tax cuts, at least for the so-called rich, which he defines as people who make more than $250,000 a year – a definition that includes most small-business owners.
For another thing, Congress can never seem to agree on a long-term vision for how to shape and maintain our tax code. Even in 2001 and 2003, when Republicans controlled the House, the Senate and the White House, they couldn’t muster enough votes to pass the Bush tax cuts on a permanent basis. The tax cut with the original 2010 sunset date was a typical Washington compromise that made no sense policy-wise, but represented the kind of political compromise that allowed the bill to pass.
When the 2010 expiration was looming, Congress and the president did nothing until after the midterm elections – and then the Democrats would only agree to a two-year extension in exchange for another 99-week extension of unemployment benefits. So we found ourselves with yet another temporary patchwork policy, accepted by one side as the price for the patchwork policy the other one wanted.
This kind of policy-making serves as a serious drag on economic growth and job creation. The business community is reluctant to commit capital over the long term because it has no idea what tomorrow’s policy might be. The most likely scenario for the end of this year is yet another assortment of temporary measures.
One of the reasons my 9-9-9 plan for replacing the tax code resonated with voters is that it’s simple and straightforward. It’s designed to raise revenue efficiently without stunting economic growth, and it’s not riddled with complexities that give politicians the opportunity to engage in endless tinkering.
Because they make tax policy in this way, we face a cataclysmic tax increase and economic meltdown at the end of this year. They must act to stop it, but it’s not enough that they merely do something. They need to stop patching up the tax code with duct tape and design a new one that’s simple, straightforward and growth-friendly. I have no expectation that this will ever happen with Barack Obama in the White House – but that’s a problem the American people can solve in November.
Once they do, they have to demand that Republicans don’t once again blow the chance to fix the tax code for real. When they feel the heat, they will see the light.