Posted by Shyam Moondra
In 2001, at the height of relative economic prosperity, President George W. Bush pushed for and got enacted unprecedented income tax cuts since the trickle-down theory pursued by President Ronald Reagan. The Economic Growth and Tax Relief Reconciliation Act of 2001 was especially generous to the rich who benefited the most. This Act, however, had a unique sunset provision which required that the enacted tax cuts expire on January 1, 2011 unless the Congress passed a new legislation making those tax cuts permanent. So here we are with this raging debate between the Republican tax cutters and Democrat spenders at a time when our budget deficit is running at record levels. Treasury Secretary Tim Geithner has said that making the Bush tax cuts for the super rich permanent would be a perpetual $600 billion-a-year mistake.
First, the timing of the original tax cuts and now making those cuts permanent seem very odd. The Bush tax cuts were enacted when economy was doing well. When economy is doing well, one would expect to increase taxes to thwart inflationary pressures and to raise tax revenues to reduce budget deficit and national debt. This is what common men would do - when they feel financially secured, they pay off their debt. Now, at the present time, when economy is not doing so well, one would expect that taxes be kept low to induce consumers to spend and keep the economic recovery alive. At the same time, given the record budget deficit and mounting national debt, one would argue that at some point taxes would have to be raised or else we would put our national credit rating at risk, in the mode of Greece-like crisis. If the deficit and debt problems are not addressed in a credible manner, the government will be forced to take stern cost cutting measures in the future that would trigger civil unrest and interest rates will go through the roof creating economic malaise for years to come.
It’s clear that the Bush tax cuts were ill-timed. It’s also clear that canceling those tax cuts right now will most likely push us into a double dip recession. Therefore, it seems sensible to extend the Bush tax cuts for everyone for just one more year and as the economy recovers, those tax cuts should then be gradually eliminated, first for those who are making more than $250,000 individually ($500,000 for family) and then in subsequent years for those who are making between $100,000 and $250,000 individually ($200,000 - $500,000 for family), while making tax cuts permanent for the rest of the taxpayers. This gradual approach will keep the current economic recovery going, increase tax revenues to reduce federal budget deficit and national debt, and bring fairness to our tax code which was heavily tilted in favor of the rich under the Bush presidency. Republicans’ desire to make the Bush tax cuts permanent will only add to the already record high budget deficit. While the Obama administration and Congress should also look for ways to cut government expenditures, the humongous deficit will undoubtedly require a combination of both reduced spending as well as tax increases. President Obama needs to show leadership and hammer out a compromise on gradually canceling Bush tax cuts for the rich and reducing expenditures. It’s important to note that President Bill Clinton’s efforts to achieve a balanced budget was instrumental in our sustained prosperity that eventually led the stock markets to record levels. At this critical juncture, we need to replicate the Clinton strategy to ensure our prosperity for the next generation.
