On 1 January 2011, the Bush Tax Cuts are set to expire and there is fierce debate whether or not to extend them. These tax cuts, despite what the liberals say, are not solely focused on “the rich”. The reduction in tax rates brought us out of the 2001 recession and contributed to the economic growth, starting in 2003. However, due to the media’s amazing work (sarcasm), people really don’t know what the 2001 and 2003 tax cuts actually did. But, that’s why I’m here.
Many people on the Left wrongly blame the current recession on the Bush Tax Cuts. They say our budget problem came from these tax cuts “for the rich”. However, as seen in this chart , the immense deficits we are facing come from excessive amounts of government spending, mainly in entitlement programs like Social Security, Medicare, and Medicaid. Meanwhile, instead of reeling in this out of control spending, in the past year, our federal government has increased the budget deficit four times the amount it was in the last fiscal year.
In another attack on low taxes, opponents have claimed the government needs the money from tax dollars (you know, since they spend it so very well). What these people do not understand is that tax revenue is not related to tax rates. As show in this chart, in every decade since the 1950s, with average top income tax rates ranging from 36.7% to 90.5%, the tax revenues hovered around 18% of the total Gross Domestic Product. So, now you might ask why don’t we just increase the GDP instead of worrying about tax rates. Good question! Well, the worst way to curb economic growth is to take money away from people. Therefore, with low taxes and decreased government spending, we should be able to not only work our way out of this tough economic period, but also pay off some of our ridiculously high national debt.
But what taxes truly help the economy? While in the past decade we have tried give Americans stimulus checks, they did not create new wealth for the country. Many people simply took the money, and either saved it or paid off debt, neither of which help the economy. On the other hand, reducing marginal tax rates actually helped the economy. In the 1920s, reducing the top income tax rate actually increased the income tax revenue, as seen in this chart. Also, in the 1960s and 1980s, lower marginal tax rates led to increased investment, higher economic growth, and increases in the GDP.
In addition, reducing the capital gains tax actually “pays for itself”. A capital gain occurs when a person invests in either stocks, bonds, or real estate, and that investment turns into a profit. So, a capital gains tax, in general, is a tax on productive behavior, a driver in the economy. The Bush Tax Cuts reduced the tax and that reduction paid for itself, and then some. As seen in this chart, after the 2003 tax cuts, capital gains tax revenues exploded to what the nonpartisan Congressional Budget Office predicted. I mean, that makes sense, right? Giving incentives for people to be more productive pushes them harder. And the investments they made are great for businesses who need the investors’ money to grow their business and grow the economy.
Despite these statistics, the Left still opposed to what they call, “tax cuts for the rich”. However, even that statement isn’t true. In 2000, the bottom 40% of the country in terms of income paid 0% of the country’s income tax revenue. Since then, that percentage of people that pay no income tax has increased to 47%. So, how do you give tax cuts to those who don’t pay taxes? Correct, subsidizes. Lawmakers of the Bush Tax Cuts expanded the child tax credit, expanded the earned income tax credit, and lowered the initial tax brackets. The result? That same group of people that paid 0% federal tax now pay -4% federal tax, meaning they receive money. Because of this, the burden of the taxes has shifted to the highest 20% of the earners, as seen in this chart.
With less than two years before these tax cuts expire, we need to make sure they are, at least, renewed. While letting them expire wouldn’t dramatically increase tax revenue, it would harm economic growth at a time that is least affordable. As Brian Riedel, an expert budget analyst says, “Lawmakers should remember that America cannot tax itself to prosperity.” If only they realized…