Why Bush's Tax Giveaways for the Rich Should Expire

Congressional Republicans have been prancing around the capitol making demands that unemployment payment be paid for by reducing federal spending elsewhere, but that tax giveaways for the ultra-wealthy ought to be charged to our national credit card.  Those who are serious about economic policy and the soaring federal deficit, however, must act like adults.  The Obama administration and Democrats in Congress (with the exception of a few) want to eliminate the Bush tax giveaways for individuals making more than $200,000 or families making more than $250,000, while extending the breaks that are enjoyed by middle class and poor Americans.

There are three good and essential reasons why tax cuts for the wealthiest Americans should expire: those tax cuts don't create jobs or spur consumer spending, those tax cuts are burdening the federal deficit, and those tax cuts are keeping us from making essential investments in our future.

Fallacy of "Job Creation" and "Consumer Spending" triggered by tax giveaways for the rich

There is no rhyme or reason to be extending tax giveaways for the super rich - there were none to give them any in the first place.  The argument that tax cuts on the rich should be extended because the rich create jobs is laughable.  Consider that the economic disaster resulted in the loss of nearly 8 million jobs happened with those tax cuts for the rich still in place.  Why were we losing 700,000 jobs a month during Bush's last year in office, if tax cuts are  the answer to job creation?  Just as importantly, during Bill Clinton's term in office, after he raised taxes on the rich, the economy experienced the longest and most successful expansion in history, creating nearly 23 million new jobs throughout Clinton's career.

Conservative Democrats have joined Republicans in this insanity chorus.  For example,
Sen. Evan Bayh (D-Ind.) said last week that raising the tax rate on that group "runs the risk of dampening consumer demand at a time when that is critical to recovery,"
This is another argument that runs contrary to reason.  Consumer markets are not driven by how much money the ultra rich have to spend.  Why?  Because the ultra rich has enough to spend no regardless of their marginal tax rate.  They have so much cash to spend anyway, they are not waiting for a tax cut to go out and buy something.  In fact, the more one earns, the less likely one is to spend an extra dollar in consumer activity (in economic terms, this is known as diminishing propensity to spend).

Chuck Murr, the Director of Federal Tax Policy pointed out in a recent report that the CBO ranks tax cuts as the least stimulative option.  Given diminishing propensity to spend discussed above, tax giveaways for the rich would stand to reason to be even less stimulative than tax cuts in general.  In fact, CBO confirms that that's the case.  According to Murr's report,

Furthermore, CBO indicated that extending the tax cuts for high-income households in particular would rate even lower in effectiveness than extending all of the tax cuts. This is because, as CBO explained, “higher-income households … would probably save [rather than spend] a larger fraction of their increase in after-tax income.”
On the other hand, if you create situations where people who hardly have any spending cash have more money in hand, they will spend it immediately.  Tax cuts targeted for the low income earners and unemployment benefits fall into this category - and we all know that conservatives in Congress were hell bent against extending unemployment benefits.

Speaking with reason, the conservatives (in either party) have no interest in stimulating consumer spending.  In fact, most of them are so out of touch, they don't even understand consumer spending.  They have an ideological bent to extend tax cuts for the rich, and they will use anything - sensible or not - as excuse.


Tax cuts for the rich are ballooning the deficit

But it's not just that the "tax increase for the rich = job killer" argument doesn't have a leg to stand on.  The Bush tax cuts - particularly those for the ultra wealthy, are making our federal deficit situation significantly worse.  Last December, the Center for Budget and Policy Priorities released a study based on the numbers of the Congressional budget office showing that the largest factor in the projected federal budget deficit for the next decade is the Bush tax cuts.  This chart by the CBPP demonstrates the point splendidly:

Bush tax cuts biggest problem in deficit

See that big chunk in the middle? Yeah, that's the cost of the Bush tax cuts on the federal deficit.  But wait a minute, you say, that's the entire Bush tax cuts, right?  Right. That includes both the middle class tax cuts and the tax cuts for the rich.  But how much of the deficit is actually attributable to the tax cuts on the rich - particularly, on those individuals making $200,000 or more or families making $250,000 or more?  It turns out that those tax cuts for the rich are about half of the total, and will cost more and more as we go into the future.  Ezra Klein demonstrates this with a simple chart - graphing the estimated effects on the deficit of extending unemployment benefits, the tax cuts for everyone else, and the tax cuts for the wealthiest.

change_in_federal_deficit,_2009-2017
Credit: Ezra Klein, Washington Post. "Fiscal Irresponsibility in one graph.

The gap between the orange and yellow lines (i.e. the gap between tax cuts for individuals making under $200,000 and those for everyone) is the effect of the Bush tax giveaways to the wealthiest Americans.  As you can see, the tax giveaways for the wealthy 2-3% of Americans cost as much as the tax cuts for everyone else combined.  Were the tax giveaways for the wealthiest to expire, by 2017, the federal deficit would be reduced by nearly $150 billion per year.  Put another way, we would be borrowing $150 billion a year to give to the richest Americans.

Every dollar in rich giveaway stops us from investing in America

Keep in mind that today, the interest on the federal debt is the second largest non-dedicated source (social security, for example, has a dedicated tax and revenue source) budget item is our interest on the federal debt.  The interest on the debt goes to no good.  It doesn't create a job, it isn't invested in our schools, it doesn't build roads, and it isn't an option not to pay it.  Every dollar we save on interest can go towards something useful in our country, but doesn't.

Even if we weren't thinking about the deficit - as many conservatives seem unconcerned when it comes to tax cuts - and were going to spend that money anyway, there are a ton of ways to stimulate the economy far more effectively than tax giveaways for the ultra wealthy.  Chuck Murr of the CBPP in the aforementioned report provides us with much more direct and stimulative ways of using that money.  In a blog post summarizing that part of the report, Murr says:
The CBO findings point the way toward sounder alternatives. Policymakers should allow the high-income tax cuts to expire on schedule and use the 2011 proceeds for policies that CBO has found would have a much higher “bang-for-the-buck” in creating jobs and strengthening economic growth, such as extending unemployment benefits and state fiscal relief, increasing infrastructure spending, and a jobs tax credit.  Once the economic recovery is secure, the savings from allowing the high-income tax cuts to expire should go entirely for deficit reduction.
In other words, use the money to stimulate the economy rather than in tax giveaways for the wealthy in the near term, and once the economy recovers, use it to pay down the debt.

Conclusion:

To recap, the Bush tax giveaways for the wealthiest Americans have done nothing but push us into further debt and prevented us from making needed investments in our country.  The extension of those giveaways has no basis in reason or in logic - but only in ideological pandering.  They do not help create jobs or spur consumer spending, they balloon the deficit, and there are far better ways of using that money to stimulate the economy in the immediate term to create jobs and provide cash strapped families some relief relief.  The Bush tax giveaways to the wealthiest Americans should expire for the sake of this country.


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