Updated July 15, 2012
It’s the summer of 2012, President George W. Bush has been out of office for 3 ½ years, and the biggest issue of the presidential campaign is whether to keep his signature tax cuts, which were first passed in…2001.
President Obama wants to extend for a year the tax cuts for households making less than $250,000 but not for higher earners. Future Republican presidential nominee Mitt Romney wants to make them permanent and then cut personal marginal tax rates by another 20%.
Congress will punt on this until after the election and maybe then, too. That’s what it and the president did the last time the tax cuts were slated to run out a couple of years ago.
Meanwhile, these tax cuts, which as I’ve written repeatedly failed to create substantial numbers of jobs, cost the Treasury $1.8 trillion in revenue between 2002 and 2009, and continue to drain our Treasury of $100 billion a year. If they’re made permanent they will add as much as $3.5 trillion to our debt load over the next decade.
And yet, no one can kill them, because once people get used to a certain level of after-tax income, removing a tax cut feels like a tax increase. That’s a very effective political argument for Republicans and was the poison pill slipped into the bill from the get-go.
The Bush tax cuts were conceived in 1999 as part of then-Gov. Bush’s campaign for the Republican presidential nomination as a way to counteract Steve Forbes’ flat tax, a fringe idea that still has a big following in the GOP (think Herman Cain’s 9-9-9).
Then it became part of an explicit strategy by President Bush to reduce the surplus we had when he took office. That’s right, the president actually told a joint session of Congress in 2001: “The people of America have been overcharged, and, on their behalf, I’m here asking for a refund.”
So, he sent Congress his tax cut plan that phased in cuts in marginal rates over five years, gave new tax benefits to retirement plans, and slashed estate taxes.
But there was a catch: The Byrd Rule allowed senators to block any legislation that significantly increased the federal deficit over more than ten years. So, the Bush tax cuts had to expire in ten years—in theory.
But in 2003, the economy was recovering slowly and there was talk of a “jobless recovery” only a year before the presidential election. So, the president pushed for a new tax cut package that made the cuts in marginal tax rates from 2001 effective immediately while reducing capital gains and dividend taxes to a top rate of 15%.
The bill was pushed through the Senate by the “reconciliation” process. Vice President Dick Cheney broke a 50-50 tie, and it became law. Not exactly a monument to bipartisanship.
So, here we are a decade later stuck with an ineffective tax cut that’s a fiscal burden but which seems politically impossible to eliminate.
It’s never a good idea to raise taxes in a recession, but this recession/deleveraging may last for years, so should we keep kicking the can down the road?
And yes, by cutting taxes, the government did return money to taxpayers, which is a good thing. But this tax cut didn’t work and we’re still borrowing money to pay for it just as surely as we are for food stamps, extended unemployment benefits, or military spending overseas.
Fact is, the Bush tax cuts are a luxury we can no longer afford. It’s time to cut them loose–all of them.