J. French Hill: Make the Bush tax cuts permanent

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The Labor Department’s recent announcement that there were 500,000 unemployment claims last week alone sends a clear signal that our economy remains in deep trouble. Our nation’s unemployment rate remains stuck near 10 percent, and some estimates suggest that the real unemployment rate — which counts discouraged workers who have given up looking for work — is above 16 percent.

The bleak employment picture raises the stakes for Congress, which has an important decision to make with regard to “Bush tax cuts,” which are scheduled to expire at the end of this year. While much of the discussion about the Bush tax cuts has focused on whether to extend reductions in marginal income tax rates, the scheduled tax increases on capital gains and dividends could have as much, or even more, impact on our nation’s economic recovery.

If Congress does nothing, every American, regardless of their level of income, will see an increase in the taxes they pay on capital gains and dividends. In fact, the tax rates on capital gains will increase the most on those in the lowest two income brackets, as they do not pay capital gains taxes. Individuals earning income from dividends will see their taxes increase from a standard 15 percent to as much as 39.6 percent. These increases could hit seniors and retirees particularly hard, as they typically rely heavily on investment and dividend income.

Some, including the president, argue that these tax increases are necessary to get control of the deficit. While they are right to acknowledge the growing concern about the deficit, raising taxes on investment income is not the solution. The fact is, raising taxes on capital gains and dividend income is likely to reduce the revenues generated by these taxes, ultimately making it harder to reduce the deficit.

While it sounds counterintuitive, higher taxes can indeed lead to lower revenues.

This fact has been borne out through years of macroeconomic research, most recently by the initial head of President Barack Obama’s Council of Economic Advisors, Christina Romer. Dr. Romer and her co-author and husband, David, have published their findings on the economic impact of all the tax changes since World War II in the American Economic Review. They state emphatically “a tax increase of 1 percent of GDP reduces output over the next three years of nearly 3 percent.” Further, they argue persuasively that tax increases have “a large negative impact on investment.” Professors Romer are coming to the same conclusion that many members of Congress and Presidents John F. Kennedy, Lyndon Johnson, Ronald Reagan and George W. Bush all realized — tax rates matter. Raise a tax and get a three time negative affect on growth.

Given the extraordinary level of economic stagnation and the recent massive increases in costs imposed by Congress on private sector job creation by huge new regulatory burdens in health, banking, securities and environment, the president and congressional leaders probably would be better off actually cutting capital gains and dividend taxes to get the economy moving again. Cutting tax rates would not only enable employers to create jobs but also increase revenues for the treasury to reduce the deficit. In fact, a 2008 report from the Department of Treasury’s Office of Tax Analysis showed that federal receipts from capital gains taxes more than doubled in the two years following the 2003 reductions in the capital gains tax rate.

Is the deficit a long-term problem? Absolutely. But our deficit problem is caused by out-of-control federal spending, not because taxes are too low. In inflation-adjusted terms, federal spending has increased by 75 percent in the past two decades — and by 19 percent in just two years.

There is a way for the federal government to cut the deficit without raising taxes. First, cut wasteful federal spending and stop throwing good money after bad and permanently reform the entitlement programs of social security and Medicare. Government spending doesn’t increase economic activity — it just shifts money from one sector of the economy to the other. And borrowing money for government spending is worse, as it simply shifts economic activity from the future, to the past — penalizing our children and grandchildren with huge debts, fewer jobs and slower economic growth.

Second, extend the 2003 dividend and capital gains tax cuts. Even better, make the tax cuts permanent to reduce uncertainty and send a clear signal to investors — let’s spur economic growth and job creation that will ultimately lead to higher federal revenues.

Failing to extend these important tax cuts would hurt income earners at all levels in the middle of one of our country’s most notable recessions. For our economy to have any chance of recovery, it is critical that our leaders in Washington look at the evidence, not at the unsupported rhetoric.

J. French Hill is an entrepreneur and banker in Little Rock, Ark. He was a senior economic policy official in the administration of President George H.W. Bush from 1989-1993 and has twice been a member of the Steamboat Institute Freedom Conference economics panel. This op-ed also will appear in Arkansas Business.

Comments

seeuski 4 years, 3 months ago

It's very informative to see that the Obama economic adviser who left her position recently had concluded previously what the awakening public has been screaming about for the last 2 years, that raising taxes reduces revenues and kills jobs. Great letter, thank you Sir.

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NamVet 4 years, 3 months ago

Make the tax cuts permanent so we can borrow another $2Trillion+ from the Chinese and Saudi's. Sounds logical.

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JLM 4 years, 3 months ago

One does not reduce the amount of money in the pockets of the population at a time of growing dependence upon government assistance --- that just forces more onto the public dole and increases demand at a time of diminishing supply.

Remember we are talking about a $2900 tax increase for a $50,000 wage earner. This is hardly the top 1% class warfare that folks like to champion.

Got a spare $2900, pal? Maybe no.

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housepoor 4 years, 3 months ago

JLM, You know your buddy Obama's plan is to extend the tax cuts for those making under $250k, are you trying to scare Joe the Plumber? And even if you do make over $250k the increase is only on that income above $250K. It does sound much scarier they way you present it though..............

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housepoor 4 years, 3 months ago

"The 3.8 million filers who fall in the $200,000 to $500,000 income range would pay $2 billion more in 2011 taxes, or an average of $532", according to a study by the nonpartisan congressional Joint Committee on Taxation.

"The biggest burden would fall on the 608,000 taxpayers who make between $500,000 and $1 million and the 315,000 who earn more than $1 million; the first group would pay $6.5 billion more, or an average of almost $10,000, and the second group would owe $31 billion more, or almost $100,000 on average", the analysis said

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Kristopher Hammond 4 years, 3 months ago

A couple of trillion dollar wars, a massive bailout, and the gov't is gonna pay for it with a tax cut for the rich? Name a country where citizens pay less income tax than Americans.

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sledneck 4 years, 3 months ago

Nam, How about "make dozens of handout programs permanent so we can borrow another 2 trillion + from china and Saudi"? How bout that? How bout "Pass another useless bailout so we have to raise taxes?" How bout that?? Arguing for higher taxes has got to be the stupidest sounding thing I have EVER heard... EVER.

Shawant, Forget less. Here are a dozen that pay NONE: Andorra Bahamas Brunie Kuwait Maldives Monaco Nauru Oman Qatar United Arab Emirates Vanuatu

But frankly I don't give a tinkers dam if other countries pay more. Other countries SUCK. SCREW other countries! Maybe THATS why the other countries citizens are comming HERE, no???

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housepoor 4 years, 3 months ago

Nice Sled, Its people like you that makes America great!!!

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JLM 4 years, 3 months ago

Remember how everything was going to be paid for by the "elimination of wasteful government spending"?

Remember the famous WH Cabinet summit wherein each Cabinet officer was tasked with "saving" an aggregate of $100MM total? Not each, total.

Well none of that has really happened.

I guess the Obama administration will get back to that after they close down Gitmo.

What we are talking about here is basic competence and these fellas are a bit short of competence.

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sledneck 4 years, 3 months ago

No, they're competent. Competent liars. Competent class warmongers. Competent blame shifters. Competent social engineers. Competent re-distributers. All the while having very competent help in the media... like so many "competent" leaders preceding them.

Don't underestimate their competence. Stalin was competent too... and potent. 31 million dead russians can't be wrong.

It's not the money you take from the "rich bastards" making over a million. It's the jobs you destroy by making the "rich bastards" not want to hire. Um,... unless any of you leftists ever got a great job offer from a "poor" person... I'm waiting...

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pitpoodle 4 years, 3 months ago

Either have a tax cut for everyone or no tax cut for anyone. I am offended by the class warfare that Obama has promoted since he took office. Class warfare is bad for all of us regardless of income or situation.

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seeuski 4 years, 3 months ago

This issue of Bush tax cuts is a ploy to divert attention from the huge increase in Gov spending under obama. I just love the continual argument that we spent a trillion on wars under Bush when it amounted to about 1.5% of GDP. Obama has cut into the GDP 10 fold of that amount and increased the deficit by some 3 trillion dollars or so. He said yesterday at his Town-hall that he wants to chip away at the Bush deficit, well that was a net 400 billion or so after the TARP payback, he is continuing his slick willy double talk for the minions who are in a permanent Obama Zombie coma.
Obama's uncontrollable giggling and smirks when he is confronted with honest questions is so low class and un-Presidential that he can hardly be taken seriously by reasonable people. I guess it's funny to him that this Country is misunderstanding what we are witnessing, "The fundamental transformation of this Country" that he promised 5 days before the election.

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seeuski 4 years, 3 months ago

pitpoodle, The class warfare falls in line with the Race warfare, political warfare, religion warfare, Unions against the private sector warfare and the FED against our States warfare that the so called Unifier in Chief has been leading from the remodeled Oval Office.

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