Dealing with the Sunset of the Bush Tax Cuts (Part I)

As the fall rolls in, Congress is expected to focus its attention on the fact that the huge tax cuts enacted under Bush (mostly in the 2001 and 2003 bills, but also in other bills during the Bush regime) were set up with sunsetting provisions.  This meant that the cuts as enacted were temporary, and that the existing tax provisions are currently slated to be reinstated beginning in 2011.  The argument for the "temporary" tax cuts was that the budget was running a surplus (a legacy from the Clinton presidency, though perhaps due as much to bubbles as to good economic policy) and that the surplus would be "returned" to taxpayers as a stimulus to growth.  There was no real growth stimulus from the cuts, and there was no return of surplus--instead, because of the huge costs of the Bush wars (estimated to run into several trillions of dollars) at the same time as tax cuts and flabby economic growth, there were a series of large deficits under Bush.  The economic crisis towards the end of the Bush regime, and the big bailout package passed under Bush, added a significant lump to the deficit.

Logic would suggest that the law should be allowed to operate as it is slated to operate.  Nobody was making big demands for tax cuts at the time that the Republican machine pushed them through.  Most people were able to manage and businesses were not going under because of the tax burden.  So why not just let the cuts expire as they are supposed to rather than passing new tax cut legislation at a time when the Republicans in Congress are now clamoring about the need to address the budget deficit?

This is a topic that is starting to heat up and is getting lots of media attention.  Not surprisingly, there are also lots of groups busy trying to spin the discussion to suit their socio-political objectives, whether or not the spin informs voters accurately about the issues.  Therefore, it seems that this is a good time to attempt to cover the debate from various perspectives through a series of articles.    I expect to pick up various releases and "reports" from think tanks and groups  and dissect them.  Are they using more rhetoric than analysis?  Are they using language that will tend to bias the reader rather than providing a firm foundation in information?  What can we really expect if Congress enacts new tax cuts to "extend" the Bush tax cuts?  What can we really expect if Congress does not enact new tax cuts but instead allows the current law to operate as intended?  (Well, "intended" probably isn't the right word.  The GOP was unmistakably clear in its intent to make the "temporary" tax cuts permanent as soon as it thought it could get by with doing so politically in the face of the facts of the steep deficits the cutting of tax revenues causes.)

Let's look at an example of the kind of rhetoric that is flying through the blogosphere these days.  I received a missive from "Melissa Kay" at a PR firm (Market Builders PR) that has pushed out various press releases about right-wing speakers to me in recent months.  It is pushing Alan Olsen, the managing partner at Greenstein Rogoff Olsen & Co. LLP, CPAs and his views of what will happen "if Bush Tax Cuts Are Eliminated".  The piece (no link provided) is called "Enjoy Them While They Last: End of Bush Tax cuts Could Throw U.S. into Deeper Recession."

• the initial heading is misleading ("Alan's Predictions if Bush Tax Cuts Are Eliminated")--the Bush tax cuts were set up to be temporary and expire by operation of law.  Nobody has to do anything to "eliminate" the tax cuts.  Congress has to take affirmative action if it wants to enact new tax cut legislation that extends any or all of the provisions in the Bush bills past their drop-dead date at the end of 2010.
• The first paragraph is misleading.

here's what it says: "Almost every tax cut implemented by Bush will disappear in 2011.  Clinton raised taxes to 39%, Bush dropped the top tax rate to 36%.  Obama will take it back to slightly more than 39%."

here's why it is misleading:  Bush didn't just drop the top tax rate.  Bush dropped the top tax rate to 36% and then also raised the top tax rate up to 39% with an effective date of January 1, 2011.  Obama has not taken any action yet, though Obama supports having individuals making $200,000 and joint filers with more than $250,000 pay taxes at the Clinton era rates and enacting new tax cuts providing Bush-era rates for everybody else.

• The first bullet point is misleading. 

Here's what it says:  "What we have now is a war of free enterprise.  The end of the Bush tax cuts in 2010 could throw us into a deeper recession."

Here's why it is misleading. 

• First, there is no "war of free enterprise."  We had a system that went haywire because policy makers were deluded by the claims of market fundamentalists (including Milton Friedman and others that ascribe to the Chicago School of Economics mathematical theorizing) and thought that markets could take care of themselves.  The result was that the U.S. finance system gyrated out of control, with shadow banks leveraging way beyond systemic risk capability, derivatives and special purpose vehicles providing banks a way to evade regulatory requirements, and the whole "innovative" process creating a kind of inbredness of systemic interconnectedness that nearly brought the world economy to a halt and threw at least 8 million Americans out of jobs.  What we have, then, is a recognition that the market fundamentalism that had been treated as "god's truth" was in fact a flawed view of how economies work and acknowledgement that the government has to intervene to make up for market flaws such as concentrated power, risky interconnectedness, and assymetric information.
• Second, there's really very little evidence to support the speculation that the slated expiration of the Bush tax cuts will "throw us into a deeper recession."  In fact, the flow of funds to the federal government and use of those funds for unemployment compensation and other state aid as well as public infrastructure projects could save us from entering into a depression.  We are a very lightly taxed nation, and yet we purport to maintain the most sophisticated military enterprise in the world, and spend many times the amount of our closest competitors in GDP on the military.  We can't continue to spend on the military and cut revenues coming into the government and have a balanced economy.  We can't have people out of work for years and have a balanced economy.  We can't continue to shortchange public education (from K1 to University) and expect our economy to compete.

• Much of the rest is merely rehashing of old conclusions from market fundamentalism

•  
  1. the idea that an investment tax credit will kickstart the economy, when in fact businesses have lots of capital standing by and have many tax incentives supporting investment, but still aren't willing to spend it,
  2. the claim that cutting taxes on capital gains and dividends will "put cash to work in our economy"--when in fact, most cash invested in stock is invested through the secondary market and not invested directly in corporate enterprises where it would help the economy and people are not going to disinvest their cash just because capital gains and dividends rates return to prior levels unless they have something else better to invest in--there really is not "cash on the sidelines", since cash that enters the system anywhere is in the system and begging to be invested in something
  3. the claim that spending should be aligned with tax revenues and that spending doesn't help us out of the recession, when in fact budget balance can be achieved by either decreasing spending or increasing revenues or both, and there is no a priori reason that the sole mechanism should be decreasing spending.  Congress did not decrease spending under Bush--in fact, it increased spending (especially when the costs of the two wars and the economic crisis are taken into account).  We need to increase revenues to retain international credibility and to fund important infrastructure that permits our economy to grow.