Tuesday, July 10, 2012

Don't Just Extend the Bush Tax Cuts - Lower Them!

President Obama initially campaigned 4 years ago on repealing the Bush Tax cuts, and then hit the hard reality that most of the tax cuts went to lower and middle income tax payers with millions cut from the tax rolls.

Then, as clearly illustrated by the confrontation with Joe the Plumber, it became a matter of “fairness,” whatever that is. The President is a true believer that the wealthy must be punished for being wealthy and their money redistributed to the less fortunate in life, the Gospel of the Reverend Wright. For example, when shown the facts that tax revenues increase when capital gains tax rates are decreased, Senator Obama replied the rates must rise for fairness.

He is a true believer in class warfare, at least during election cycles, except when he is fund raising in Hollywood and the Upper East Side.

He cares more about his concept of fairness than jobs.

The Top 1% already pay about 40% of the federal individual income tax revenues.

One of the lessons of the Great Depression is that raising taxes in a recession could turn it into a depression. 

President Obama has been warned by his economic advisers against raising taxes, but the only job he really cares about is his own. Hence a campaign based on class warfare.

His proposal to extend the Bush Tax cuts to those earning less than $250,000 is going nowhere in Congress. 

Even many Democrats disagree. Some, such as House Minority Leader Nancy Pelosi, the House Minority Whip Steny Hoyer, and Senator Charles Schumer of New York are on the record for a $1,000,000 cutoff, while several others wish for an extension of the entire Bush tax cuts.

President Obama is simply recycling his rhetoric from 2 years ago when, lo and behold, the lame duck Democratic Congress extended the Bush Tax cuts for 2 more years, expiring December 31 this year.

A cut off of either $250,000 or $1 million will result in a substantial tax increase to the top tax earners. In the case of the $250,000 limit, the tax increase will be borne mostly by small business operators, who normally file at the individual rate. They are the major job creators in the nation.  

Senate Majority Leader Harry Reid has introduced in the Senate a targeted jobs creation bill. It is labeled “The Small Business Tax Jobs and Tax Relief Act.” It is a recycled bill that was rejected by the Democratic Senate last year.

It provides a 10% tax credit for new hires and a 100% writeoff of new machinery purchased by small business. The cap on the credit is $500,000.

Targeted tax cuts don’t work for a couple of reasons. First, they are based on the premise that career politicians and bureaucrats, who have often never worked in the private sector, know more about business than businessmen.

Second, they normally do not change the overall economic cost-benefit analysis. Business will add employees to meet an increase in revenues. A one time only tax credit will not cause an employer to add to the payroll when looking at substantial payroll taxes, including ObamaCare in two years. The new employee must survive a cost-benefit analysis, which is alien to D.C.

If substantial tax credits were successful, then solar energy would have become a winner with the federal and state credits in the 1970’s during the Arab Oil Boycotts. Similarly, the tax credits should have spurred sufficient demand in the past three years to sustain Solyndra and its kin.

If targeted tax credits worked, then maybe GM might be able to sell its hybrid albatross, called the Volt.  The gas-battery hybrid gets an EPA adjusted city/highway mileage of 96MPH. That sounds like a winner, but it lists at a base price of $40,000 and only gets 25-50 miles on its battery. For $23,000 you can buy a Toyota Prius in Orange County.

Uncle Sam offers a $7,500 tax credit on the Volt.

GM has sold 16,814 Volts from December 2010 through June 2013, with a high of 1,760 in June 2012. 

Don’t get excited though. GE has agreed to purchase 12,000 Volts through 2014. Without GE’s purchases, the VOLT would be DOA.

Tax cuts raise revenue and spur economic growth.

We forget that when George W. Bush became President, the dot.com boom crashed resulting in a economic crash in America. The dot.com bubble reached its peak in March 2000, and then headed south, compounded by 9/11.

The Bush Tax Cuts not only lowered the income tax rates, but also lowered the capital gains tax to 15% from 20% and the tax on dividends also to 15% from 39.6%. The purpose was to free up capital and encourage investment. Capital gains tax revenues doubled in three years from $56  billion to $110 billion - quite a success.

The Bush Tax Cuts were critical in reviving the economy and resulted in substantial revenue increases. Unfortunately, first the Republican Congress and then the Democratic Congress increased spending faster than revenues, a truly bipartisan effort abetted by the Bush Administration.

43 though never repeated the mistake of 41, who raised taxes in spite of a “No New taxes Pledge.”.

One of Senator’s John F. Kennedy’s campaign vows was to get the economy going again. President Kennedy proposed substantial tax cuts, cutting the highest rate from an unbelievable 91% to 70%. His proposal was criticized from the left on grounds of unfairness. He could not get it through Congress, but it became one of President Johnson’s earliest priorities upon assuming the presidency. The Revenue Act of 1964 enacted the Kennedy Tax cuts. Both Presidents Kennedy and Johnson understood the way to increase revenues was to grow the economy, and broad based tax cuts would accomplish that goal. Tax revenues rose substantially in 1964 and 1965.

The Kennedy demand side tax cuts were a success.

So too were President Reagan’s when he inherited an economic disaster from President Crater, including a prime interest rate of 21.5%. The economy added 5.2 million jobs during President Reagan’s first term in office eventhough the first two years were a disaster, cleaning up after the Carter debacle.

President Obama’s record though last month is a net loss of 473,000 jobs since January 2009, with an unemployment rate stuck above 8%..

Broad based tax cuts raise revenues and create jobs.

Governor Romney has proposed extending the Bush Tax cuts and cutting tax rates a further 20%.

The Governor’s time tested plan would jump start the moribund economy.

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