The Case for the Bush Tax Cuts

By Bob Adams
 
On Dec. 31, 2010, the historic Bush tax cuts of 2001 and 2003 will automatically expire if Congress does not act; assuring almost every working American will be hit with a massive, across-the-board tax increase.  
 
Worse yet, many economists believe allowing the Bush tax cuts to expire will be devastating to the economy.
 
“When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe ‘double dip’ recession,” wrote economist Art Laffer in a Wall Street Journal column on June 6, 2010.
 
Known on Capitol Hill as the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003, these two historic tax cuts pulled the U.S. economy out of the throws of recession following the “dot-com bust” of the late ’90s and the post-9/11 shock to the U.S. economy.

The 2001 tax cuts, the largest since 1981, reduced individual income tax rates from 15, 28, 31, 36, and 39.6 percent to 10, 15, 25, 28, 33, and 35 percent. It also included a phased-in reduction in estate taxes, otherwise known as the “death tax,” with a full repeal in 2010. 

In 2003, Congress passed an additional package of pro-growth tax cuts, reducing the top capital gains rate from 20 percent to 15 percent and the top individual rate on dividends from 35 percent to 15 percent, in part mitigating the “double tax” on investment income.

The Bush tax cuts did the job as intended, sparking renewed economic growth, capital investment, and job creation in a flagging U.S. economy.

According to a study from the Heritage Foundation (entitled, “Ten Myths about the Bush Tax Cuts”):

Notwithstanding, President Obama’s Office of Management and Budget Director Peter Orszag once described the Bush tax cuts as reverse government redistribution of wealth, "[shifting] the burden of taxation away from upper-income, capital-owning households and toward the wage-earning households of the lower and middle classes."

Injecting “class warfare” at its most dishonest level, this has become the battle cry of liberals in the Congress and radicals in the Obama administration.

In fact, the Bush tax cuts of 2001 and 2003 proved highly progressive. According to the Congressional Budget Office, the tax burden to the wealthiest top 1 percent increased from a 22.9 percent to a 25.3 percent share of overall tax liabilities.

According to The Wall Street Journal on July 21, 2008, “the top 1 percent of taxpayers, those who earn above $388,806, paid 40 percent of all income taxes in 2006, the highest share in at least 40 years. The top 10 percent in income, those earning more than $108,904, paid 71 percent . . . Americans with an income below the median paid a record low 2.9 percent of all income taxes, while the top 50 percent paid 97.1 percent.”

If the Bush tax cuts are allowed to expire, the capital gains tax will increase to 20 percent from 15 percent.

To understand the corrosive effect a capital gains tax increase has upon economic growth, all one needs to do is look back in history to the last time Congress foolishly increased the tax on capital gains tax.

After the 1986 Tax Reform Act, which increased the capital gains tax from 20 percent to 28 percent, “between 1986 and 1992 business fixed investment fell by half. Business investment in equipment fell by one-third over the same period” (Stephen Moore and John Silvia, Cato, 1995).

The tax rate on dividends will also increase, and will no longer be taxed at the capital gains rate for individuals, thereby increasing taxation of dividends to as much as 39.6 percent.
 
This will encourage debt finance over equity finance, reduce the payment of dividends to investors, and also hold back much needed investment capital.
 
Moreover, Obamacare will begin applying Medicare taxes to unearned income in 2013, such as dividends and capital gains — another nail in the coffin for investors. Combined with a Medicare tax increase from 2.9 percent to 3.8 percent for individuals with annual income over $200,000, the federal government expects to haul in $210 billion to pay for Obamacare.

Perhaps the most destructive of all taxes is the inheritance or gift tax, more commonly known as the “death tax.”  This tax, which will increase to 55 percent on Jan. 1, 2011, strikes at the very foundation of savings, capital formation, and investment.
 
Resurrecting the death tax, which dropped to zero in 2010, creates the perverse incentive for individuals to consume their wealth as opposed to investing or saving it to pass on to the next generation.  

The death tax often can break up a family business and kill off jobs by forcing the liquidation of a company’s assets merely to pay the federal tax due, which is assessed upon non-liquid capital, such as equipment and property.

While some in Congress believe the death tax can be made more fair by providing for an exemption for smaller estates, the fact is, the larger the estate the more destructive the tax to savings, capital formation, and investment.

According to Daniel J. Mitchell, a senior economist at the Cato Institute, “Scholars who have examined this issue estimate that the death tax has reduced America's stock of saving and investment by nearly $850 billion. Moreover, the death tax is a job killer, reducing employment by 1.5 million.”

In the middle of the worst recession in recent history, now is not the time to raise taxes. Congress should fully and permanently renew the Bush tax cuts this year.

Sign Fred Thompson's Petition to Renew the Bush Tax Cuts — Click Here Now.