Without wanting to give in to any simplistic hyperbole, it must be said that the Bush tax cuts are the single worst piece of legislation in modern times. I should say that when I say 'worst piece of legislation" I am speaking of economic legislation and I am defining "modern times" here as since Herbert Hoover or starting with FDR-modern economic times for the US began with FDR taking the oath of office.
In this modern, enlightened age, Mr. Bush's signature tax legislation is the most regressive, reactionary legislation to be passed into law. We are still suffering the effects of this fiscal travesty 10 years later.
On some intuitive level. I have always understood this, but what has brought this up in an increased crystallized light is a book by Paul Krugman I am currently in the middle of, "The Great Unravelling." Published in 2005 it is actually a compilation of articles he wrote from as early as the late 90s-we have a few pieces by him on the Asian and Long Term Management crises of the time as well as the debate on the Internet boom/bubble- until 2004.
Right now I am reading a series of pieces he did on the Bush tax cuts. It is a must read for anyone who wants to accurately understand the Bush tax cuts and their untoward effect on our nation's finances to the present day. If you want to know why the choices currently on the table-"politics of austerity"-are so dismal, understanding Bush's tax cuts are a major part of this.
We have heard a lot of talk about "starve the beast" but Bush didn't merely talk about this, he did it. Today we have a roughly 1 trillion dollar deficit-'deficits as far as the eye can see' and Bush is who we have to thank.
To be sure there is a lot of spin here. Obama bashers try to point out that the deficit was "only" about 400 billion when Obama came to office-sometimes they further cheat by claiming it was "only" 182 billion which was actually the 2009 projection in 2008 for 2009.
The 600 billion increase under Obama was of course due to the recession and we will eliminate this when we get out of the current crisis-I know "when" is way too optimistic, really the accurate word here is "if"-providing we can ever have any policies that might make this an actual possibility.
What makes it so hard to have these policies remains the Bush tax cuts. They are what gives us deficits as far as the eye can see for the foreseeable future and they are the reason S&P is now giving for the downgrade. As I explained in my last piece I disagree with S&P's decision and there should be hearings on this but their pessimism because of the Bush tax cuts-which they doubt will expire in 2012 as they should-is quite justified.
What makes the Bush tax cuts so pernicious? Let us count the ways. As indicated above Bush has to be the favorite conservative for the Right because his tax cuts-much more even than Reagan who at the time didn't have the political ability to go as far-have made "starve the beast" more than a theory but reality.
Bush backloaded the tax cuts so that his successor would be the one to be hamstrung. This was by design-really he and his budget people have to be admired for the way they put this together.
Politically it was pure gold. They had just enough goodies in it for the middle class and the poor-expanded earned income tax credit, child tax credit, closing the "marriage penalty" and of course cutting rates of all tax brackets that
1) it seemed fair as 'everyone saw their taxes cut'
2) make it impossible politcally to ever really let them expire.
This is why the Republicans in Congress in 2010 were so against agreeing to a deal which would extend the tax cuts for the middle class and poor separately.
In other words most of the tax cuts by political necessity will never expire. Most Americans do want to the wealthy brackets go up but not anyone else, certainly not themselves.
I don't blame them for this either, however if we did-of course we never will-allow all the tax cuts to expire our budget deficits would be gone over night. True we'd see all tax brackets go up, even the lowest income level would go from 10 to 15%. Can see the headline already right? "Democrats propose a 50% hike on the lowest income earners! Vote Republican!!"
Yet while no one wants their taxes to go up or to lose some pretty helpful tax credits, would you be willing to trade them for the starkly better economic times of the 90s?
What would be interesting would be for someone like the Tax Policy Center or the Economic Policy Institute to analyze what would be the macroeconomic effects of allowing all the Bush tax cuts to expire. You might find that the person who saw their income tax go from 10 to 15% would still end up very much on the net plus side-as there would now be money for social spending, stimulus, etc. Would this person be willing to pay a higher rate in exchange for having a better economy and ultimately a higher standard of living?
Of course the question is never packaged this way.
What's also always forgotten is that US income taxes are marginal-which means that when you cut the lowest bracket from 15 to 10 and the top rate from 39.6 to 35 the person in the top rate gets both tax cuts as they pay the same lowest rate for that part of their income. So if all 5 tax brackets are cut, they actually get 5 tax cuts as opposed to just 1 for the lowest level.
It's already becoming clear how much Bush's tax cuts were skewed to the wealthy.
Then you add that, as Krugman shows, while these were income taxes, most people (4 out of 5 Americans) pay most of their taxes in payroll taxes. Payroll taxes at 16.5% is a flat tax-"flat tax" is a euphemism for regressive tax. A tax cut more friendly to the non-rich would be a payroll tax cut. Another regressive thing about the payroll tax is it has a cap at 106,800 of earnings.
As Krugman shows, one of the more surreal aspects of that debate over Bush's tax cuts was the testimony of Alan Greenspan before Congress. While he has urged fiscal discipline with Clinton he now declared in 2001 that having outsized budget surpluses was somehow a terrible risk and that these surpluses must be disposed of as soon as possible.
That these surpluses were projected-and wouldn't pan out history shows-did not give him pause. Much of the surpluses were actually in SS and Medicare. This is why Al Gore had urged in the debate with Bush in 2000, to put the SS funds in a "lock box" but Gore was portrayed as somehow "talking down" to Americans in saying this.
Ultimately then Bush stole from Obama. He also stole from future Social Security beneficiaries and all of us.
As we noted above it is politically untenable to rescind all the tax cuts-and maybe even undesirable anyway. Here is a best case scenario on what should be done, goes without saying it is far from seeing that it will be done anytime soon.
The tax cuts for the wealthy should expire as most Americans want. However the outrageous situation that capital gains are taxed at only 15% compared with 35% for income must end. The top rate should go back to 39.6 but the capital and dividend rates should also go back to that number. This would already make up a lot of our budget shortfall.
Another wrinkle we could add is to raise the marginal rates on top income earners as well. Maybe someone above a certain income level-say 1 million-should pay not just 39.6% for money above the top level but on all of it. If not that maybe a milder change where his lower marginal rates are raised but not all the way to the top rate.
Liberals are libeled as being "tax and spend" but actually I'm one liberal who would love to see a tax cut for most Americans-how about a payroll tax cut? As far as losing income, we would more than make it up by removing the cap on payroll taxes and perhaps ending the flat tax for payroll.
Krugman, on pg 254 of The Great Unravelling sums up Bush' tax cuts perfectly, "A slump in the economy in the short run was the opportunity to push a tax cut that provided very little stimulus in the short run, but will place huge demands on the budget in 2010."
He wrote this in 2002-and as he points out elsewhere, the original rationale was that the surplus needed to be dispensed with lest it be used in some nefarious way(government buying in the market, etc), once the surpluses disappeared the rationale changed- but it couldn't be more prophetic
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