The Economy and the
Future of the Bush Tax Cuts

 By John Hendrickson

  

“Tax revision should be viewed only from the angle of what is best for the country as a whole,” noted Andrew Mellon who served as Secretary of the Treasury and engineer of the Harding- Coolidge prosperity of the 1920s.[1] This fall Congress will be debating whether or not the tax cuts initiated by Congress during President George W. Bush’s administration (Bush Tax Cuts) will be renewed, partially renewed, or allowed to expire, which would cause a massive tax increase in a weak economy. Although the economy has shown some signs of recovery from the “Great Recession,” the economic outlook is still uncertain. Unemployment is currently at 9.5 percent and the current policy direction, including the future of the Bush Tax Cuts, has caused uncertainty in the marketplace. Ending the recession and creating jobs requires not additional stimulus spending, but renewing the Bush Tax Cuts and cutting government spending, which will provide a stimulus for the private sector and eliminate uncertainty.

 

If the Bush Tax Cuts are allowed to expire tax rates will increase across-the-board. As described recently by economist Arthur Laffer in The Wall Street Journal:

 

George W. Bush’s tax cuts expire (January 1, 2011) on that date, meaning that the highest federal personal income tax rate will go to 39.6 percent from 35 percent, the highest federal dividend tax rate pops up to 39.6 percent from 15 percent, the capital gains tax rate to 20 percent from 15 percent, and the estate tax rate to 55 percent from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts.[2]

 

Although renewal of the Bush Tax Cuts is still uncertain, it does appear that some Democrats in the United States Senate are supporting a renewal of the tax cuts. The debate will surface over whether or not all of the cuts will be renewed, or just the cuts affecting the middle class. “The Obama administration’s approach is to look at tax policy mainly through the prism of class warfare,” noted Dan Mitchell, a Senior Fellow at the CATO Institute.[3]

 

Mellon argued that “tax revision should never be made the football either of partisan or class politics,” and he stated that he “never viewed taxation as a means of rewarding one class of taxpayers or punishing another.”[4] The current tax debate must be examined in light of what will best work for the economy, and the question must be asked whether or not a substantial tax increase will help or hinder the economy.

 

Peter Morici, an economist and Professor at the University of Maryland’s Smith School of Business, recently wrote that “raising taxes now would kill the economic recovery, push unemployment well above ten percent and boot the real problem, runaway spending, to President Obama’s successor.”[5] Even though the economy has shown some positive signs of recovery the situation is still fragile as business confidence remains low, unemployment is still at 9.5 percent, and the issue of uncontrolled government spending is threatening the financial security of the nation.

 

Failure to renew the Bush Tax Cuts will result in an economic decline and continual high unemployment. Businesses, investors, and entrepreneurs will not be investing in the economy, hiring new employees, and creating new products if they are faced with high rates of taxation. Currently businesses are not investing, but waiting with anxiety to see what policies will or will not be enacted by Congress and the Obama administration. “But where the government takes away an unreasonable share of his earnings, the incentive to work is no longer there and a slackening of effort is the result,” wrote Mellon.[6]  In addition, he argued that “more and more the business adventure becomes too hazardous and the high spirit of initiative disappears in discouragement.[7]

 

“As a result of higher tax rates on those people in the highest tax brackets, there will be less employment, output, sales, profits and capital gains — all leading to lower payrolls and lower tax receipts,” wrote Laffer.[8] In fact, recent history has shown that lowering taxes not only leads to economic growth, but increased revenues for government. The tax cuts initiated in the 20^th century by Presidents Warren G. Harding, Calvin Coolidge, John F. Kennedy, and Ronald Reagan all created periods of economic growth and encouraged the private sector to work.

 

All of the Bush Tax Cuts should be renewed, but in addition to renewing the tax cuts, Congress must begin to cut spending and paying down the debt. The economic stimulus, which cost $862 billion, failed to solve unemployment, and federal spending on entitlements, including the new health-care reform law, is creating an unsustainable financial situation. The Congressional Budget Office has projected that by the end of the decade “President Obama’s budget will push the debt to $20 trillion.”[9] Currently the national debt is over $13 trillion, the deficit is projected to be $1.3 trillion, and deficits are projected to continue. The problem is not tax cuts, but rather uncontrolled government spending.

 

The battle in Congress over the Bush Tax Cuts is a larger debate over political philosophy. President Obama and Democrats in Congress are continuing to push an agenda that rejects limited government in favor of an expanded welfare and regulatory state. It is exactly this agenda — health-care reform, expanded financial regulation, cap and trade, tax and spending increases — that is preventing an economic recovery. Steve Forbes, editor-in-chief of Forbes, recently wrote that “this Administration remains resolutely statist and, when it comes to free markets, clueless.”[10]

 

Perhaps the best example for the administration in promoting economic and financial stability is following the ideas of Presidents Harding and Coolidge. As economic historian and CATO Institute Senior Fellow Jim Powell recently wrote:

The financial achievement of Harding and Coolidge was extraordinary in light of subsequent experience — cutting spending 50 percent, taxes 40 percent, and paying off almost a third of the debt during that decade. And getting unemployment lower than in any other peacetime period on record before or since.[11]

The possibility of the economy falling into a double-dip recession is still a possibility. In order to bring economic stability, business confidence, and start resolving the spending crisis policymakers must not only renew the Bush Tax Cuts to encourage private sector growth, but also to start reducing spending. Mellon argued that “the adoption of a sound system of taxation will have a favorable effect in many directions,” including the promotion of business and “increase the number of jobs and at the same time advance general prosperity.”[12] 

 

John Hendrickson is a Research Analyst at Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.