They're Playing Chicken With Tax Cuts
Fiscal Policy: It's tempting to think of the debate over extending the Bush tax cuts as just more inside-the-Beltway political infighting. It isn't. Failure to extend the cuts will badly damage our struggling economy.
Senate Democrats on Friday signaled that they plan to play a game of political chicken with Republicans, putting off extending the Bush-era tax cuts at least until after the Nov. 2 election is over.
As we have said, letting the Bush-era tax cuts expire is bad politics for many reasons. But it's even worse economics. It turns out a lot of economists agree - and are now coming out and saying so. Will the Democrats listen?
They insist they'll only let taxes rise on "the rich." "There will be no increase in middle-income taxes," Senate Majority Leader Steny Hoyer vowed over the weekend.
Fine. If that's how Democrats feel, why not just do it? The answer, of course, is they don't want to face the wrath of voters who don't share the Democrats' vision of perpetual class warfare on the rich.
Apparently, the voters know something that congressional Democrats don't. An urgent letter to President Obama from 313 leading economists warns that letting the Bush cuts expire - even just on the rich - willl lead to serious economic consequences for the U.S.
The group includes Nobel prize winner Vernon Smith, former Federal Reserve Governor Wayne Angell, economist Allan Meltzer of Carnegie Mellon University and a host of others from investment houses, think tanks and universities across the country.
Their warning to the president is stark.
"The promise of a tax increase in January 2011 would create significant economic distortions as individuals and businesses conserve capital or stave off hiring," the economists said in their letter.
If all the cuts expire, the 10% lower tax bracket would disappear, and the top marginal tax rate - the one that many small businesses and entrepreneurs pay - would rise from 35% to 39.6%.
Moreover, tax rates on capital gains and dividends, now both at 15%, would rise to 20% for capital gains and 39.6% for dividends.
This would hit saving and investment hard - killing off thousands of future jobs by hitting not just the "rich" but the "many small businesses that file their taxes through the individual tax system," the economists wrote.
Recent reports support this idea. The National Federation of Independent Business, for instance, estimates that 50% of owners of small businesses with 20 to 250 workers would be in the top two tax brackets - the very brackets Democrats target for tax hikes.
Another study, this from Congress' Joint Committee on Taxation, notes that 55% of the higher taxes on upper-income Americans will be paid by small-business owners.
Raising taxes on the rich, the 313 economists assert, penalize "entrepreneurship and potentially (leads) to a harmful sell-off of assets in December of this year." And since they create virtually all new jobs in the U.S. economy each year, Americans could be in for a long spell of European-style double-digit joblessness.
Since the "stimulus" was passed, 3.6 million jobs have disappeared. Even economists at the Federal Reserve are worried. In a newly released study, Fed economists warn that, based on current trends, real GDP growth will likely remain "at or below potential" through mid-2011. If so, the study says, "the unemployment rate could rise by as much as 0.5 percentage point."
Democrats like to use the phrase "reality-based" a lot, especially when it comes to their own party. Well, here's a dose of reality for them: The tax cuts that were approved early in the Bush administration and which you have derided for seven years are critical to the economy's health. Reverse them at your own political peril.
