What is a Tax Cut?

Seems like a rhetorical question that has an obvious answer.  However, looking at some of the things said by the wizards of smart in our government and media, I have to wonder if the answer is so obvious anymore.  This is the reason for this post.

Leaders, and I use that term loosely for many of them, in the government and media have finally begun to discuss the economic repercussions of allowing current income tax rates to revert to the rates of the Clinton Era.  It is true that the economy prospered under these rates but in retrospect, we now understand that the reason for this economic boom was the dot.com boom.

After the dot.com bubble burst and after the terrorist attacks of 9/11, the economy began to slide into a recession.  In order to stop this slide, President Bush proposed, and Congress passed an across the board tax cut which prevented a recession and actually ushered in a period of prosperity until September of 2008.  These tax cuts were actually tax cuts because they actually reduced everyone’s, and I mean everyone’s tax liability (1).  You can go to  http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456 and see the numbers from the nonpartisan Congressional Budget Office for yourself.  The numbers reveal that everyone benefited.  The numbers also reveal that the lower and middle class that saw the greatest decrease in their effective tax rates.  This makes this an actual tax cut. 

However, based on the rhetoric we have been hearing recently, we might have to change the definition of a tax cut.  Liberals constantly say that the Bush Tax Cuts were a tax cut for the rich even though the numbers reveal they benefitted the least in terms of a reduction in tax rates.  They also tell us that because of the ballooning deficits, we cannot afford to cut taxes by extending the Bush Tax Cuts.  Excuse me, extending these tax cuts is not a tax cut but only a continuation of the current tax rates which taxpayers have become accustomed to paying. 

We will also hear these same liberals state that extending the tax cuts will have no stimulating effect on the economy, which is true.  However, this is not because tax cuts do not stimulate economic growth as some liberals contend.  For example, in an essay by James Kroeger (2).  Mr. Kroeger states  that even though tax cuts provide more money for consumers to spend, it deprives the government of money it would have spent resulting in a zero increase in economic activity.  Even though this can be seen as true, we must also consider what the money is spent on.  Recent stimulus spending by the government has proven ineffective because it is usually spent on worthless projects such as Solyndra, which is now bankrupt.  This means that the government, an unsecured creditor of Solyndra, will only receive pennies on the dollars back on their loans to them if anything at all (3).  This is hardly an example of efficient government spending or investment but what did they have to lose, it was not their money but the taxpayers.  Private industries are much more efficient in how it spends or invests its money because its investors are spending and investing their own money and have something to lose. 

Mr. Kroeger also states in his essay that wealthy taxpayers, who have everything they need, will not spend their tax cut but save it which will have not stimulating effect on the economy.  This once again fails to consider what happens when someone saves money.  When someone puts money in a savings account at the bank, the bank does not just lock that money up in a vault, the bank loans it out at a higher interest rate than what is paid to the saver.  This is how banks make money.  The money the bank loans out is actually multiplied because it is used to buy a new car, home, or to start a new business. 

This leads me to my final comment.  President Obama finally weighed in on the tax cut extension issue this week by agreeing to an extension for one year but only for taxpayers earning less than $200,000 AGI per year for single taxpayers and $250,000 AGI for married couples and businesses (4).  This is in keeping with his promise not to increase taxes on the middle class and to increase taxes on the rich.  However, this once again fails to look at the total picture for we must consider who these rich people are. 

“They could be your neighbors, one a banker and the other a lawyer, especially if you live in an expensive high-rise in New York City.  Or, it could be the rancher who is still driving a 1980s-era pickup truck.  Or, maybe it’s the retiree in Florida who plays tennis every day and still tells his son or daughter how to run the family business.  Many are likely to be entrepreneurs.” (5)   These rich people as Obama puts it are the job creators in our country.  Putting a tax increase on them at this time will do nothing to create jobs for those currently unemployed. 

Even President Obama’s former economic advisor Christina Romer argued that tax cuts work as an economic stimulus. (6)  Maybe this is why she is a former economic advisor.  Economic stimulus through tax cuts is the main component of Mitt Romney’s economic plan.  He wants to place more capital in the hands of the private sector where it will be more efficiently spent and invested and out of the inefficient hands of big government.  In other words, Mitt Romney believes in real tax cuts. 

I encourage everyone to share this information via email, Twitter, Facebook, or any other means you have.  The media and government are attempting to change the definition of what a tax cut is.  We must combat this rhetoric with the truth. 

1. Tax Policy Center. Historical Effective Federal Tax Rates for All Households. taxpolicycenter.org. [Online] Congressional budget Office, April 4, 2011. [Cited: July 14, 2012.] http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=456.

2. Kroeger, James. Do Tax Cuts Stimulate the Economy? nontrivialpursuits.org. [Online] [Cited: July 14, 2012.] http://nontrivialpursuits.org/economic_stimulus.htm.

3. MacDonald, Elizabeth. The Solyndra Bankruptcy. foxbusiness.com. [Online] Fox News Corp., October 3, 2011. [Cited: July 14, 2012.] http://www.foxbusiness.com/markets/2011/10/03/solyndra-bankruptcy/.

4. Bendery, Jennifer. Obama Calls For One-Year Extension Of Bush-Era Tax Cuts For First $250,000 Of Income. huffingtonpost.com. [Online] The Huffington Post, July 10, 2012. [Cited: July 14, 2012.] http://www.huffingtonpost.com/2012/07/09/obama-bush-tax-cuts-middle-class_n_1659284.html.

5. Scherer, Ron. Obama tax proposal: Who makes more than $250k, and are they rich? csmonitor.com. [Online] Christian Science Monitor, July 10, 2012. [Cited: July 14, 2012.] http://www.csmonitor.com/USA/DC-Decoder/2012/0710/Obama-tax-proposal-Who-makes-more-than-250k-and-are-they-rich-video.

6. Carney, John. Christina Romer’s Study Found That Tax Cuts Work As An Economic Stimulus. articles.businessinsider.com. [Online] Business Insider, November 22, 2011. [Cited: July 14, 2012.] http://articles.businessinsider.com/2011-11-22/markets/30428028_1_tax-cuts-government-spending-david-romer.