Thursday, December 2, 2010

The looming Obama tax increases

Will the Bush tax cuts become the Obama tax increases?

There has been much talk recently of extending the Bush tax cuts.  These tax cuts were passed during President Bush’s administration in 2001 and 2003 to fight the recessions that resulted from the tech stock bubble and the 9/11 terror attacks.  To get the votes needed to pass the tax cuts, an expiration date of December 31, 2010 was written into the law.

These tax cuts are already established into law and taxation has been based on these rates since 2003.  Therefore, the discussion now is not about whether to cut taxes, but about whether to increase them.  If Congress fails to extend the tax cuts, then Georgians, like the rest of America, will receive a tax increase on January 1.  This will be approximately the same time that taxpayers will be receiving their Christmas credit card bills.

The effect of increasing taxes in an already slow and fragile economy is likely to be a double-dip recession.  As money leaves private hands to go into government coffers, people will have fewer dollars to save or spend.  Businesses will sell less and hiring will slow.  As more people become unemployed, spending and hiring will further slow in a vicious cycle.

The disagreement between the two parties is that Republicans want to extend all tax cuts while Democrats only want to extend the cuts for people who make less than $250,000 per year.  Republicans have threatened to block any legislation that does not extend the cuts for all taxpayers.

Democrats cite the need to raise tax to pay for the record-breaking spending spree of the last two years.  On the contrary, noted economist W. Kurt Hauser points out that regardless of tax rates, the government takes in about 19% of gross domestic product (GDP).  This is known as Hauser’s Law. 

Since the government’s revenue rate will be approximately the same regardless of tax rates, the better option would be the policy that leads to economic growth.  Lower tax rates usually foster more growth that high ones.  Keeping tax rates low means that the government would be taking 19% of a larger economic pie and would actually take in more real dollars that with higher tax rates.

In the weeks remaining before Congress adjourns for the year, we can expect much maneuvering on the issue.  Republicans, who won the election, don’t have enough members of Congress to force passage of the tax cut extension but can block a tax increase with a filibuster.  On the other hand, Democrats, many of whom are lame ducks that will be leaving Congress, have no incentive, other than the greater good of the country, to work with Republicans.  It is likely that Congress will adjourn without having resolved the issue and leaving Americans with a New Year’s tax increase.  If this happens, it will be up to Republicans, including Georgia’s Representative-elect Austin Scott to work with a Democratic-controlled Senate to extend the lower rates retroactively to prevent a second recession.

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