Here is the fourth of my posts inspired by an editorial cartoon this week. Today’s was drawn by Lisa Benson.
The tax cuts that President Bush pushed for are slated to expire January 1st, 2011. And for many Americans, it means a tax hike. You can calculate and see if that’s the case using this handy form from the Tax Foundation. I did a quick test and found out that I’ll be coughing up almost $2,500 more if the tax cuts go away. I don’t know about you, but $2,500 is a bunch of money!
But there is something else worth considering. Bush’s tax cuts have and will affect the overall economy. The tax cut law was signed by President Bush on May 28, 2003, and the effect was quickly seen. The GDP growth for the second quarter of 2003 was 1.10%, but in the third quarter, with the tax cuts in effect, the GDP growth was 2.25%. GDP growth more than doubled, thanks to cutting the top rates people had to pay. Also interesting is the growth of private investment before and after the tax cuts. The private investment rate two quarters before the tax cuts kicked in were 0.61% and 0.42% while the two quarters afterwards were 3.96% and 4.50%. When people realized they could keep more of their hard-earned money, they were willing to invest it in the economy. Since the tax cuts had been heavily debated for a while before their passage, it’s very possible that many businesses and investors held off purchases and big spending until after the tax cuts kicked in.
Let’s take a look at where we are now. We are almost a mirror opposite of 2003. Instead of anticipating tax cuts and postponing activities, businesses are anticipating tax increases and hurrying to do what they can to earn before the taxes go up. As I see it, the rush by businesses and investors to get while the getting is good is boosting this weak economy. Once President Bush’s tax cuts expire, there won’t be nearly as much effort to work for less. I see a deeper recession if the tax cuts expire, and I’m not the only one seeing it.
“In a worst-case scenario, allowing the Bush tax cuts to expire and failing to fix the AMT could result in (1.5 percent) of fiscal drag in 2011 on top of the 1 percent fiscal drag we expect to occur as the Obama fiscal stimulus package unwinds,” Deutsche said in a note to clients. “If the recovery remains soft/tentative through early next year, this additional drag could be enough to push the economy to a stalling point.”
The opinion runs counter to that of Treasury Secretary Timothy Geithner, who said earlier this week that allowing the cuts to expire would not cause the economy to re-enter recession. The administration has proposed letting most of the tax cuts stand, but eliminating the ones for the top-tier earners.
Deutsche compared the situation to Japan in the 1990s, when the government let tax cuts expire and cut stimulus, leading to another leg down in the recession and ensuring the nation’s “lost decade” of no economic growth.
Our Treasury Secretary Timothy Geithner says that letting the tax cuts expire wouldn’t cause the economy to re-enter a recession. And government said that the multi-billion dollar stimulus would hold unemployment at 8%, but we are sitting at 9.5%. The administration doesn’t have a good record when it comes to foreseeing the results of their actions. Heck, our Treasury Secretary has a hard enough time just paying his own taxes.
How could we get out of our current recession? I have a plan that would do so in just three easy steps. But Congress would never do it because it means reducing their power. And they can’t have that.