Historians have rated George W. Bush as only the 7th worst President in American history, which really seems like less than he deserves. Still, when economic historians get to vote, it seems likely that hell not only get first place in the economic fraud category, but might get 2, 3, 4 and 5 to show that nobody else even comes close. The tax cuts that bear his name hurt the United States, leading to incredible deficits, and ultimately didnt benefit the people they were meant to enrich. Then, to make things worse, we really cant afford to let the tax cuts die the natural death they deserve.
The Bush tax cuts were targeted towards the wealthy by the relatively simple device of cutting taxes on income thats mostly restricted to wealthy people: corporate dividends. Dividends arent a perquisite of wealth; lots of middle class people have non-retirement investment accounts, and there are probably others getting dividends from Walt Disney just because they wanted the stock certificate with Mickey and Dumbo on it (Dreamworks has Shrek on its certificate but for some reason, the woman on the Playboy stock certificate has her clothes on) but most middle class families, if theyre holding individual stocks, have them in 401(k) plans, which are already tax deferred. If a few middle income families benefited from the tax cuts, the Republicans no doubt thought of that as collateral damage.
The tax cuts reduced the governments tax receipts by over a trillion dollars, and did nothing to stimulate the economy because the wealthy people who benefited had no reason to rush out and spend their windfall. The economy grows when money gets spent, and while a poor person with an extra dollar might run straight to the grocery, raising the profits however marginally for the grocer and farmer, an investment banker wouldnt notice an extra $10,000. When youre trying to stimulate the economy, the goal is to increase the velocity of money, the speed and frequency with which it changes hands. Thats why extending aid to the long term unemployed, in addition to being the moral thing to do, acts as a stimulus. Tax cuts for the already wealthy just adds to the imbalance of wealth and makes conditions worse.
The tax cuts are due to expire at the end of 2010, and should, really should, be allowed to die. Unfortunately, that would be a bad idea. While middle income families didnt get a significant share of the tax cuts on dividends, they did get a portion of the increase when stock prices went up. The Dow Jones Industrial Average, which was about 9,700 in 2000, hit a peak of over 14,000 in 2007, and this increased the value of 401(k) and 403(b) accounts. When the financial crisis hit, the Dow Jones dropped to roughly 8,000, and plans for a comfortable retirement or a college education, disappeared just as quickly.
As the country began recovering from the Great Recession, the Dow managed to get back to 10,400, not enough to rebuild retirement and long term savings, and has been shaky since then.
Allowing the cuts to expire on schedule would make stocks a less desirable investment for the wealthy. Without the inducement of low tax liability, wealthy people will sell off the stocks and switch to other investments. A sell-off would drive prices down again. The people whom the Bush tax cuts were aimed at may have lost millions, but theyre still rich, while a middle class family that managed to set aside a few hundred thousand towards retirement has no margin for error.
Since the Bush tax reductions applies to dividends, a sell-off would apply mostly to the safe widows and orphans stocks, the choice of low-risk investors. Meanwhile, of people over the age of 55, only 19% have over $250K in their retirement accounts. The middle class didnt benefit when the taxes on dividends went down, but they suffer when the market value of their stocks declines.
The Bush tax cuts have to go, but probably not all at once. An equitable approach would be to phase the Bush tax cuts out over a period of 5 or more years, but also institute a millionaires supplement tax to recoup some of the losses over the past 10 years. A return to a truly progressive tax system wouldnt hurt the super rich, and might reduce the deficit to a more acceptable level. The only problem is, the rich wont give up without a fight, and when they fight, they usually win.
Sam Uretsky is a writer and pharmacist living on Long Island, N.Y. Email email@example.com.
From The Progressive Populist, September 1, 2010
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