Friday, January 7, 2011

Lessons From the Lame-Duck Tax Rates Battle

n the recent debate about ending or prolonging the Bush tax rates, the Democrats subtly staked out a new fiscal doctrine — not increasing tax rates costs the government money and increases the deficit.

What we heard ad nauseam from President Obama and congressional Democrats was that keeping the Bush rates in effect for those earning more than $250,000 will “cost” the government $700 billion in lost revenue over the next ten years and increase the federal debt by the same amount. That supposedly is the difference in revenue generated by the top income Bush rate (35 percent) relative to the Clinton era top rate of 39.6 percent.

The Bush tax rates had been in effect for seven years and represent what had become the status quo. Although they were originally passed with an expiration date, that hardly makes them unique in any meaningful sense. Since tax rates have been increased and decreased numerous times in the past, no one could assume they are ever permanent, whether they have built-in expiration dates or not.

The top rate decreased under President Reagan (from 70 percent to 28 percent), increased to 31 percent under President G.H.W. Bush, increased to 39.6 percent under President Clinton, and decreased to 35 percent under George W. Bush.

If we are going to calculate revenue lost when tax rates are not increased by 4.6 percent, why stop there? Following the Democrat logic, it “costs” the government money whenever taxpayers are allowed to keep any of their earnings. Accordingly, any tax rates below 100 percent on everyone are costing the government money and adding to the national debt.

This Democrat position reveals a profound difference in fundamental beliefs between liberals and conservatives. For liberals, the basic premise is that all wealth is, or should be, the property of government or the collective. That’s their starting point.

The basic conservative belief is that wealth belongs to those who created it. Conservatives believe tax increases damage the economy. Conservatives are much more concerned about the health of the overall economy than they are about the well-being of the government.

The Democrats desperately need to believe that all wealth rightfully belongs to the government. They have a bottomless pit of wonderful things they want to spend the money on. Their avarice defines their ethic. Big-government Democrats have a desperate need for money. Wealthy people have money. Ergo, go get it!

The Democrats implicitly assumed that, for those earning more than $250,000, the Clinton era tax rates are “the way it’s spozed to be.” They projected federal tax receipts under the assumption that those rates would be reinstated. In anticipation of that revenue, they spent the money. In fact, they spent a lot more than that. As usual, the Democrats created their own problem by spending revenue before it existed. They literally could not wait to get their hands on your money. Republicans, of course, were not innocent bystanders in this shameful behavior.

One interesting inconsistency the Democrats maneuvered themselves into was their less than total rejection of the Bush tax rates. The rate structure they wanted was a Bush/Clinton hybrid, what you could call a political Prius, or maybe a genetically modified rate structure. They wanted the Bush rates for incomes up to $250,000, and the Clinton rates thereafter.

The Democrats have maintained for years that there was absolutely nothing good about anything George W. Bush did while he was in office. We were told that the only people he cared about were his rich cronies. Apparently that was not the whole story.

Something else revealed in the tax rate debate is that many on the left, including some in Congress and the administration, despise anyone earning high incomes. You can almost see their eyes bulging when they say “tax cuts for millionaires and billionaires.” The left want these people not just to provide additional revenue, they want them punished. They apparently consider upper income tax rates as more of a fine than a tax. Exactly what millionaires and billionaires are guilty of is never specified.

Democrat politicians will rarely admit what they really want top income tax to be. It would be great if they could be up front about how much progressivity they want in their heart of hearts. They don’t want to tell us that, of course, because they are well aware of how politically devastating it would be.

One exception is Robert Reich, the former Secretary of Labor under President Clinton. In a recent column he advocated a top rate of 70 percent. He did not specify how much it’s costing the government not to have a 70 percent top rate.

The expiration or retention of the Bush tax rates has not been permanently resolved. The rates have been extended for two years only. This brief extension adds to the climate of uncertainty that is one of the biggest obstacles to economic recovery. Furthermore, in two years or less we will again be treated to a new round of class warfare.

Republicans were able to buy time for the full range of the Bush tax rates, but they had to hold the country’s entire middle class hostage to do so (according to President Obama). They need to be well prepared for what we know will happen two years from now. If the economy is recovering by then, they will not be able to use the argument that you can’t increase taxes in a recession. There are numerous reasons why raising taxes is a bad idea and the Republicans better be ready to articulate them.


Lessons From the Lame-Duck Tax Rates Battle January 6, 2011

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at

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