What to Do about the Bush Tax Cuts to Avoid Going Two Steps Forward and One Step Back

by Shannon Burkhead November 26 2010, 17:29

 

I was six years old when my father first told me “there’s no such thing as a free lunch.”  However, as a six year old, I had no concept of money, taxes or other individuals, so this declaration meant nothing to me.  All I cared about was nap time, lunch and recess.  My dad must have been crazy, because as far as I was concerned, some nice lady gave me my lunch every day and it certainly didn’t cost me anything.  However, now as a twenty something, in my seventeenth year of education, I realize that even if something seems free, someone somewhere is paying for it (likely through taxes).  So, thanks dad, for paying for my lunches all those years ago (and my seventeen years of education).  

As 2010 slowly – or quickly – draws to a close, one thought on everyone’s mind is what is going to happen to the infamous Bush Tax Cuts.  Almost everyone can agree that our economy is faulty at its best and utterly failing at its worst, but despite everyone recognizing a problem, no one can seem to come up with a solution.  

One possibility, which President Obama advocates, is to abolish the tax cuts for the “wealthy,” while keeping them in place for everyone else.  William Gale, director of the Urban Brookings Tax Policy Center,argues that the rich will simply invest their money, which won’t stimulate the economy, while the government can do a number of things with the taxes they would receive from raising their taxes, including extended unemployment benefits, infrastructure projects and other such aid to state and local governments.  Once all the numbers are in, the Tax Policy Centersuggests that just 1.7% of households would pay higher taxes under the president's proposal than if Congress extended all the 2001 and 2003 tax cuts, which begs the question of whether Obama’s new plan is really all that unfair. 

As Roberton Williams, senior fellow at the Urban Institute, points out, Obama’s proposal includes hiking the rates on capital gains (from 15% to 20%) and by taxing qualified dividends at 20%. Hiking rates on capital gains and dividends ultimately affects those who have large amounts of investment and Williams reminds us that if the Bush tax cuts simply expire, the top dividend rate would sky rocket to 39.6%.  Again, this begs the question of whether Obama’s new plan is really all that unfair.

Fairness aside, the big problem with Obama’s plan is that it’s not going to fix our economy.  Quite frankly, our economy can’t handle a permanent extension of the tax cuts for 98% of Americans.   The treasury estimates that the costs of making the tax cuts permanent for everyone for the next decade would be roughly $3.7 trillion; $3 trillion of which would be from extending them for the vast majority of Americans, as the Obama plan would do.  We can’t afford to “lose” $3 trillion, solely because Obama made a promise to not increase taxes on those who make under $200,000.  The happiness of 98% of Americans isn’t more important than working towards ensuring that future generations have a solid economy.

While the debate over the Bush Tax Cuts rages on for another 59 days, there are a number of other viable options to keep in mind, some of which may take time, but ultimately could be better in the long run.  Maya MacGuineas, director of the fiscal policy program at the New America Foundation, lists a couple viable options, which may take time to implement, but in the long run may make the world a happier place. After struggling to understand the Internal Revenue Code, the only thing that makes me feel better is that no one understands the Code.  While a complete overhaul of the Code would be ineffective and time-consuming, there are a couple key starting points.  First, tax consumption, rather than taxing individual income.  This will not only make everyone happy (especially those in a higher tax bracket), but may also cut down on frivolous spending and excessive waste.  Second, take a hard look at all the loopholes in the Code that cuts down on the government’s revenue by an estimated $1 trillion.  

Another viable option would be to take the money that the government now has from the cuts expiring and placing that money back in the hands of specified groups, acting as a stimulus.  MacGuineas notes that a temporary stimulus put towards unemployment benefits, aid to states, a payroll tax cut, and business incentives for the weakest sectors (such as housing) would cost roughly $350 billion over the next two years, but save almost $3 trillion over the decade. Most importantly, however, is the immediate positive impact on the economy.  

Americans, as a whole, have a tendency to live in the present.  However, there have been generations before us and there will be generations that come after us.  For the United States to even try to remain the great nation we once were, we need to learn from the past and apply it towards improving the future.  Unfortunately, for our economy, there is likely no fix that will be both quick and permanent.  We vote politicians into officeto “fix things”and when we don’t see results, we vote them out of office the first chance we get.  While politicians need to stop thinking about how best to get reelected and start thinking about working together to help improve the economy (and society’s problems in general), we, as citizens, need to accept thatthey can’t fix the economy by themselves.  

Everyone likes to blame someone else for their problems.  Growing up, I was incredibly gifted at blaming my parents for everything.  Now, when just about anything goes wrong, I (almost eagerly) blame Congress.  However, the truth is that we are all to blame for the current state of our economy (though the degrees of culpability vary).  Citizens and businesses, alike, seemingly enjoy taking out huge loans, not repaying them and then running to the government for help.  Similarly, if you do receive government funds, please use it wisely and understand that the government is not just an endless money bank put in existence to help you.  We need to start working with the government instead of constantly fighting it.  Otherwise, it will wind up being a “two steps forward and one step back” outcome.  Thinking about the present is great, but without worrying and thinking about stabilizing the future, current quick fixes may not go very far.  While there are many possibilities about how bestto improve the economy (and the Bush Tax Cuts, in particular), one thing is certain: we won’t get anywhere if we continue to fight each other every step of the way. 

 

Tags:

Tax

Comments are closed

Theme by Mads Kristensen

Invitation


We invite law professors, practitioners, and students to submit short articles for publication on this website. Simply email articles to the editors of the journal using the "Contact" form link above.   We also strongly encourage readers to post comments relating to a specific article or a topic covered by an article on the website. Just click on the "Comments" link located in the post footer below each article.

Recent Comments

Comment RSS

Disclaimer

This Journal is published by members of the Business Law Society at the University of Illinois College of Law. It is not a publication of the University of Illinois, and, therefore, the University of Illinois bears no responsibility for its content. Moreover, this Internet publication is prepared as an informational service only and should not be relied upon as legal advice. Although every attempt is made to ensure the information is accurate and timely, the information is presented "as is" and without warranties, either express or implied.