Posted by
Kharmin on Wednesday, December 08, 2010 12:00:00 PM
Several days ago, a colleague of mine emailed me the following question:
So I can understand the idea of not
extending the tax cuts at all because we are in so much debt. I
can also understand extending them only for the middle class (though
I have a hard time believing someone making a quarter mil
per year is middle class). Can you explain why it is a good
idea to extend them for the wealthy?
I wrote a lengthy reply and decided it would be better to post it here which would allow for others to review and pass comment on my answer. Please enjoy, and keep the flames to a minimum.
Kharmin Replies:
First, I reject the premise of the
question/argument as it is factually inaccurate.
There are no tax cuts for the wealthy.
There are no tax cuts for the middle class. Heck, there are no tax
cuts for the poor (or at least those who pay taxes, but that's an
argument for another day). What is set to expire on December 31,
2010 is the adjustment of the marginal tax rates which were put into
place in 2001 by President Bush in response to the economic fears
that resulted after the terrorist attacks in September of that year.
In 1988, President Reagan lowered the
marginal tax rate from 38.5% to 28%, and the US had one of the
biggest economic booms on record (prior to this, President Carter's tax
rates were at 70% in 1980, during one of the worst economic times
after the Great Depression). In 1991, President GHW Bush
increased the rate from 28% to 31%, bowing to pressure from Congress
and his need to increase spending (not his greatest moment in this
author's view). Riding the wave of economic prosperity ginned up by
Reagan and somewhat continued by Bush 41, President Clinton enjoyed
the fruits of their labor. However, in 1993, the marginal tax rate
was hiked from 31% to 39.6% as Clinton struggled to balance the
budget and pay for his administration's policies, all the while his
administration’s economic team was cooking the books (Source).
Admittedly, I am not a tax expert;
however, I am able to do some Internet research. In 1993, the
marginal tax rate for the top bracket of individual earners ($250,000
at that time) was 39.6%. This tax rate held firm from 1993 until
2001, when it dropped to 39.1%. In 2002 it fell further to 38.6% and
in 2003 it continued to drop to 35% where it currently stands. This
is the rate that is scheduled to expire which would vault the
marginal tax rate back to 39.6% (Source).
Note that these percentages are for the
top bracket earnings. All brackets have a marginal tax rate and all
of them have been proportionally affected. For example, the lowest
bracket in 1993 enjoyed a marginal tax rate of 15% ($36,900 at that
time), dropping to 10% in 2001 and remaining there. This tax rate
will return to 15% at the end of 2010 (Source).
If these tax rates are extended (or
made permanent), then no one would receive any tax cut. If these
rates are allowed to expire, then everyone would receive a tax
increase.
Many small businesses file their taxes
on an individual basis. These business owners would be hit with a
increased tax burden at a time when the economy is in severe decline.
With this increase looming, small businesses have been reluctant to
make any purchasing or hiring decisions until they are certain how
these taxes will affect their bottom line. Additionally, Obamacare's
mandates on businesses create further dis-incentive for those owners
to invest or hire.
Extending these tax rates for only the
middle-class would be difficult as the current consensus that defines
that group is those earning less than $250,000. This would not
include many small businesses-- the companies that make the economy, and
America, grow.
What is needed is making the marginal
tax rate permanent, or even lowering it further, to drive business
owners to invest in their companies and make hiring profitable.
Removing the mandates of Obamacare would likewise fuel further
investment – why would employers want to hire someone if it is going to
cost the company more in benefits?
We don't need to keep bailing out banks
by giving them taxpayer monies: the banks have enough money. What
they don't have are customers. Business owners do not want to take
loans from banks with the uncertainty that they would be able to pay
them back, so the economy slow-boils in a malaise. We need to
encourage businesses to grow, and increasing tax burdens and other
government regulation does not accomplish this.
Also note that the marginal tax rate is
not the only thing that is in play. Many other tax incentives are
also part of the Bush 43 tax rates (called the Economic Growth and
Tax Relief Reconciliation). Capital gains, retirement accounts,
alternative minimum tax (AMT), estate and gift taxes are several
other taxes which would be affected (Source).