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The Reformed Broker

We've become accustomed to its face: Tax cuts and 'My Fair Lady'

With the Bush tax cuts set to expire in January, it seems there are far more problems than solutions when it comes to what we should be doing to try to control, and ultimately reverse, the effects of the recession. 

By Guest blogger / August 16, 2012

Former US President George W. Bush smiles as he watches a baseball game between the Detroit Tigers and the Texas Rangers, in this August 2012 file photo, taken in Arlington, Texas. The former president is done and now can relax, but with his tax cuts set to expire in January, a lot of economists and businessmen are feeling far less jovial.

LM Otero/AP

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Being a pragmatist in this day and age is pretty difficult in light of the fact that there simply aren't any answers to the most pressing issues of our time.

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Joshua has been managing money for high net worth clients, charitable foundations, corporations and retirement plans for more than a decade.

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No, really, there are precisely zero solutions.

Let's take our deficit and national debt issues - they are different but also they go hand in hand.  Now it's very obvious that defense spending and health care costs are crushing us.  Social security and unemployment benefits aren't doing us any favors either.  And it's not just the static amounts of these debts, it's the upward trajectory with no end in sight that's really the most vexing part of it all.

But these are protected budgets for political reasons and quite frankly, the time to slash this spending is when you can (in a good economy), certainly not now when to do so would cripple what's left of the recovery.  And so you hit on another solution - raise revenue.  Obviously no one can do that with the middle class because everyone thinks they are in the middle class and a pol can't do the type of 11-months-a-year fundraising he or she must with a middle class tax hike on their record.  You can't raise taxes on the low income earners because they can't (and don't) pay any taxes to begin with.

Which brings us to the Bush tax cuts which are set to expire anyway beginning in January.  They were a scam from day one and did nothing of lasting import for the economy other than shift more wealth upward to where it wasn't needed anyway.  The whole reason these cuts are sunsetting to begin with is because of the way they were passed, by Parliamentary trick (reconciliation) rather than by legitimate congressional ascent.  Please don't take my word for it, listen to Paul O'Neill, Bush's SecTreas at the time of their passage:

President George W. Bush didn’t want to deliver a tax overhaul. He wanted to deliver the tax cuts he’d promised as a candidate, Bloomberg Businessweek reports in its Aug. 6 issue.

He did, in 2001 and then again in 2003. Yet the kinds of cuts he’d promised -- large ones -- would create unsustainable deficits after 10 years, the Congressional Budget Office projected. So they were designed to expire in a decade, at least on paper.

It was “baloney,” says O’Neill, who publicly supported them at the time. Republicans never intended to let the cuts lapse. “It was put in there so they could make a fiscal claim that it wouldn’t damage us. It had nothing to do with reality.”

But there are two problems with these tax cuts sunsetting - to paraphrase a popular song lyric from 1956's My Fair Lady, we've grown accustomed to their face.  Allowing these tax cuts to fade all at once could be catastrophic for spending, capital formation and markets, etc.

And besides, the idea that we can simply take more from the rich might be socially satisfying in such a lopsided economy, but it doesn't actually solve the original problem of debt and deficit anyway.

Here's TaxBytes (IPI):

But can tax increases on the wealthy provide enough funding to maintain the status quo?

The president’s wish to abolish the Bush tax cuts for those making over $250,000 per year is projected to bring in only $0.7 trillion over the next decade. Remember, the deficit over that same period is $13 trillion. So that doesn’t come close.

How about the so-called “Buffett Rule,” which would apply a minimum tax of 30 percent on individuals making more than $1 million per year? It would, according to the Joint Committee on Taxation, raise only $46.7 billion over 10 years. Even its most adamant advocates only claim that it would bring in $0.5 trillion over ten years. With a $13 trillion deficit, that doesn’t work, either.

And these are all static estimates that assume we can raise taxes on the wealthy with no harmful impact on investment and economic growth, which ignores the real-world impact of tax increases.

In other words, none of these “tax the rich” solutions makes a dent in our deficit and debt problems, because there just aren’t enough rich people to soak in order to plug a budget hole this big.

And so the pragmatist comes back around to the fact that we probably need a combined effort to cut wasteful spending, raise tax rates on the wealthy in a modest way, make hoarding and saving even more uncomfortable and avoid giant budget cuts until we're out of stall speed and on a sustainable growth track.  This is easier said than done, politically speaking.  There's also the fact that austerity and growth do not actually ever co-exist in real life.   When you hear a politician, like Geithner, talk about growing through shrinking, you know he is either lying or naive.

Intellectually speaking, the most logical approach might be to allow the "system to clear" and let the chips fall where they may.  But in actual practice that is really the ugliest option and perhaps the most unrealistic - everyone has too much invested in the current world, the post-apocalyptic world on the other side of economic purging is not something most would like to explore.

There are indeed no answers, only incremental opportunities to make things less bad along a bumpy road.  There will be near misses and scares and moments of chaos ahead, balanced out by the fact that the Fed is willing to go the distance with interest rates.  I'm not sure I like it, but I don't know what I would alternative I would like any better.

So we learn to live with it, the problem with zero solutions.  We invest around it and work around it and get up each morning to get the kids fed and dressed and out the door.  And keep the faith that time - and only time - will provide an answer eventually.

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here.To add or view a comment on a guest blog, please go to the blogger's own site by clicking on www.thereformedbroker.com.

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