Tax cuts will pay for themselves! The logic is that if we cut taxes, money people don't pay to the government is money they themselves will spend. This spending will stimulate demand and in turn boost the economy. As such, this tax cut extension will pay for itself by creating enough job growth and the government will get money back in income and sales taxes revenue and this will lower the deficit.
Unfortunately, this is just not true under the current circumstances. Too many companies aren't spending profits to reinvigorate the economy; they are saving for future hardship. Private saving is normally a very good thing for economic growth tomorrow, but not when we need to spend to stimulate the economy today. Moreover, the deficit will continue to grow with this tax cut extension. Any home in America knows that if you decrease your revenue you can't afford as much, unless you borrow, but then you are in debt. This is America, but in the trillions of dollars.
Democrats wanted to extend the tax cuts for everyone making less than $250,000 in a household. The Republicans wanted to extend this for everyone or no one. In the end, a deal involving extending unemployment benefits is likely. But consider that for persons making more than $1 million, the tax cut extension gives them an average tax benefit of only $6,349 according to the Urban-Brookings Tax Policy Center, a trivial amount to a millionaire. Meanwhile, persons making between $50,000 and $75,000, their tax benefit from the extension is about $1,100, an amount that can pay off some lingering bills or substantially help around the holidays.
This extension for just the 2 percent adds an additional $600 billion to the deficit. For persons making over $250,000, this return to Clinton/pre-Bush rates would almost pay for the $787 billion recovery stimulus. And considering that there are a good number of people in that top tax bracket who were responsible for the reckless business practices that caused the economic crash in the first place, we shouldn't feel too bad to see their taxes return to the Clinton era when the economy and deficit were good.
Moreover, the Bush tax cuts were politically motivated, not motivated by good economics.
They were ill-timed economics not because tax cuts are a bad idea - tax cuts are a good idea given the appropriate conditions.
They were ill-timed because tax cuts while fighting wars in Iraq and Afghanistan made the deficit and our debt go through the roof, which were completely predictable outcomes. I'm all for tax cuts, provided they are at the right time.
What people don't seem to take into consideration is that letting the Bush tax cuts expire isn't a tax hike; expiration was a planned rollback to the Clinton era tax level, a time when the economy was very strong. What seems to have happened since 2003 is that America has gotten comfortable with the new lower tax level. Unfortunately, this new lower level is not sustainable if we don't want to have a crippling deficit. We could cut government spending, but that would undermine the economic recovery.
The argument that rolling the tax rate back to the Clinton era is going to be a job-killer for small businesses doesn't hold much water.
Under the Clinton tax rate, the economy was thriving and we didn't have the deficit that has been growing since 2002. This extension of the tax cut may be necessary to stimulate the economy right now, but we must keep in mind that it is not sustainable in the long run.
Once jobs return, which they will if we act prudently, we are not going to need to worry about unemployment as much but we will need to deal with our deficit and debt a lot more.
Consider that when Ronald Reagan cut taxes, our deficit soared. When Bush tried this, our deficit soared again. We should know that when Obama does this, our deficit will soar.
Economic theory tells us it may be necessary for the deficit go up in the short run to stimulate economic recovery; however, we should be very worried about how Dems and Repubs are going to cooperate to reduce it; the current record on cooperation is abysmal. 2011 will certainly be loaded with a lot of finger pointing between the two parties over who is at fault for our deficit.
PAUL HEROUX of Attleboro has a master's from the London School of Economics and is a master's candidate at Harvard University's JFK School of Government. He can be reached at Paul_Heroux@hks11.harvard.edu.