Should the Tax Cuts Be Allowed to Expire

At the start of his presidency, President George W. Bush believed that it was necessary to cut taxes in order to spur the economy. During his first term (2001–2004), he obtained Congressional approval for the Economic Growth and Tax Relief Reconciliation Act of 2001, the Job Creation and Worker Assistance Act of 2002, and the Jobs and Growth Tax Relief Reconciliation Act of 2003. These acts decreased all tax rates, reduced the capital gains tax, increased the child tax credit, and eliminated the so-called "marriage penalty.” The tax cuts are set to expire at the end of 2010. The question is whether the cuts should be extended or allowed to expire.

So far, these tax cuts have cost the government $2.48 trillion. This includes the revenue loss of $2.11 trillion that resulted directly from the Bush tax cuts as well as the $379 billion in additional interest payments on the national debt that we must make since the tax cuts were deficit-financed.

When Bush took office in 2001, there was no deficit. He inherited a $236 billion budget surplus, with a projected 10-year surplus of $5.6 trillion. As a result of the tax cuts and Bush’s continued spending, including two wars and expansion of the Medicare drug benefit, the deficit at the end of Bush’s term for fiscal year 2009 was in excess of $1.2 trillion. Thus, President Obama inherited most of the deficit for which he is now being criticized.

The dispute between conservatives and liberals in Congress over whether to allow the tax cuts to expire or to extend them, and even make them permanent, reflects deep philosophical differences between the parties. Republicans hate budget deficits and loudly call for reduction of spending, but despite the fact that the tax cuts caused huge deficits, they are united in their demand that the tax cuts be extended. Democrats are willing to extend the tax cuts for the middle class, but wish to allow the tax cuts for people making over $200,000 per year to expire. Republicans claim that this would be disastrous at a time of economic difficulty, but leading economists say that expiration of the tax cuts for the wealthiest Americans would have no adverse effect on the economy. Remember, these taxpayers are wealthy people! They have an upscale standard of living. Repeal of the tax cuts will not make them poor. It would not cut down on their purchases, because they do not use all of their income to purchase things. It is well known that the very rich use only a small portion of their income to make purchases. They put the rest of their income in savings. Allowing the tax cuts to expire would result in only a small decrease in their savings.

Economists have pointed-out that the “Program for America” pushed by Republican leaders would be impossible to implement. Nobel Prize laureate Paul Krugman explains that if we were to follow the Republicans program, keep the tax cuts, keep funding the wars, keep Social Security and Medicare, but cut enough spending to balance the budget, the remainder of federal government would disappear. There would be no federal departments, no federal agencies, no federal programs of any kind—nothing. The Republican program would be impossible to implement.

When the Obama Administration was faced with the recession it was necessary, in order to avoid a horrendous depression, to intervene and spend government money to stimulate the economy. All of the leading economists supported the stimulus, and all of them now know that it worked. Robert J. Samuelson reported in Newsweek that when Obama took office in early 2009, the economy and financial markets were in virtual free-fall. By summer they were steady. Alan Blinder of Princeton and Mark Zandi of Moody’s Analytics estimate that without the government’s aggressive response, gross domestic product would have dropped 12 percent instead of 4 percent, and 16.6 percent of jobs would have been lost instead of 8.4 percent.

Republicans cannot have their cake and eat it too. They cannot eliminate deficits and still maintain gigantic tax cuts for the wealthy. They cannot have a stimulated economy and still avoid government stimulus. The truth is that the Republicans are not worried about the economy. They are worried about their wealthy contributors. The tax cuts for the middle class should be extended, but the tax cuts for those fat cats should be allowed to expire.