Wednesday, December 8, 2010

The True Cost of Extending The Bush Era Tax Cuts

- by New Deal democrat

From the NY Times Economix blog, Sunday:
how else Congress could spend $60 billion a year — the annual cost of extending the Bush tax cuts on income above $250,000 a year?
From the NY Times News section, quoting the National Governors' Association, Sunday:
By the end of fiscal 2011, states estimate that they will have spent nearly $240 billion in Recovery Act funds. Within this temporary aid to states, $151 billion has been flexible funds (Medicaid and State Fiscal Stabilization Funds) that has helped states avoid draconian cuts. However, the wind down of these flexible funds in fiscal 2012 will result in a cliff of more than $65 billion.
Maybe all those who lose their jobs or otherwise suffer from state and local budget cuts can get jobs polishing the billionaires' yachts.

Bonddad here:

There are plenty of fiscal issues involved, especially with the high end tax cuts.

Let's start with this question: please draw a "laffer curve" using all available data that demonstrates where the optimum tax rate would be. Here's the answer -- you can't. Tax rates are simply way too complicated to reduce to a graph drawn on a napkin (unless you're in public relations and not economic analysis). In addition, ever notice that everyone who uses the argument that the laffer curve is valid also assumes current tax rates are on the right side of the curve? It never occurs to anyone that rates -- which are already low -- are too low (again, according to the laffer curve).

Let's look at this from the standpoint of personal behavior. Letting the tax cuts expire would not lead to a Herculean increase in tax rates -- that is, we're not seeing a jump from 39.6% to 75%. Instead, we're talking about a few percentage points. To argue this will grossly distort personal behavior in such a manner as to lead the economy into recession is ludicrous.

No -- we are not being overtaxed in the US. According to the CBO, individual income taxes amount to 8.5% of GDP -- which is about in the middle of their historical average and hardly overly burdensome. In addition, total federal taxes are at their lowest level in 60 years.

And no -- tax cuts do not lead to jobs. Ask any business owner what will lead them to hire new employees and they'll all give you the same answer: sales that are increasing at a somewhat predictable rate and a certain amount of overall economic predictability.

Then there is the fact that ratings agencies have stated this move will lead to problems for the US fiscal future.

Then there is the simple issue that it costs money to run a country -- especially one the size of the US. There are roads to pave, kids to educate, services to provide that in one way or another benefit us all. Yet we want everything for free.

Finally -- before the trolls come out -- we also need to cut spending, which I've noted on many occasions as well. Our primary long-term issue is medical expenses as a percent of spending.