The so-called Bush tax cuts were implemented as part of The Economic Growth and Tax Relief Reconciliation Act of 2001. The act lowered the highest income tax rate from 39.6 percent to 35 percent by 2006 and reduced other brackets’ tax rates, as well. Then, in 2003, another legislative package added reductions in capital gains taxes and dividends. The combined packages provide income tax breaks for education, families with children and married couples.
The idea behind the reductions was to encourage work and investment, thereby helping to stimulate long-term economic growth; and it worked.
Prior to implementation, the country was experiencing a sluggish economic period. Shortly thereafter, the economy’s annual growth rate increased from an anemic 0.3% in 2001 to 2.5% in 2002. By 2004, yearly growth was the highest in two decades.
President Obama, nevertheless, remains opposed to the cuts, insisting that taxes must be increased for Americans in the highest tax bracket, forcing many into a 39.6 percent top bracket instead of the current 35 percent rate. If nothing is done by January of 2013, the cuts are set to expire, resulting in a massive tax increase for many Americans.
Ignoring the reality that raising taxes on job creators in the present climate is dangerous policy, the president recently proposed to temporarily extend the tax cuts for only the first $250,000 of annual income. His suggestion was met with opposition from economists who contend that the tax cuts should remain in effect for all households regardless of income.
In making his case for tax increases, he has framed the issue as a choice between supporting the middle class or giving breaks to the wealthy. But, there are problems with his rationale.
For example, the Bush tax plan is not the culprit responsible for causing our economic malaise; unbridled spending is. Indeed, the positive effects of the tax cuts have been undermined by anxiety originating from years of reckless government expansion. It is impossible to have low taxes and high spending while remaining financially responsible at the same time. The answer is not to raise taxes, but to decrease spending.
Moreover, higher marginal tax rates discourage work and investment. It is estimated that a five percent increase in individual tax rates decreases private business investment – a central part of any dynamic economy – by roughly ten percent. Higher rates likewise create uncertainty, rendering long-term planning speculative, so businesses feel compelled to reserve cash and reduce investment for growth.
Increased tax rates will also harm many small corporations and their owners by limiting their ability to hire new employees. In fact, thousands of companies will be impacted if the cuts are allowed to expire, since 75 percent of them file their business income on their personal taxes, according to the National Federation of Independent Businesses. Although only three percent of small businesses would be directly affected, that three percent is responsible for employing approximately 25 percent of the nation’s workforce.
Perhaps worse, however, by resorting to envy and class warfare to justify a tax increase on the purportedly wealthy, the President assigns some degree of morality to government taking of private property, but such rhetoric is merely an ugly attempt to justify the confiscation of taxpayer money by politicians who prefer to spend it for selfish political purposes. There is nothing moral about a government bureaucrat deciding when and to what extent a citizen spends his money, just as there is nothing noble about coercion. How is it logical to equate morality or charity to an action of which one has absolutely no control?
An inequitable tax system actually has an immoral effect on society, since a longstanding order already exists whereby good behavior generally reaps rewards and bad behavior generally derives undesirable consequences. Responsible decision making and hard work usually result in financial benefit, while poor decision making and lack of discipline often result in financial difficulty. A tax scheme which redistributes capital, notwithstanding the established order, has the immoral effect of reversing natural outcomes and encouraging improper incentives. Wherever government advances, individual responsibility retreats.
Whether or not the victim of the government’s taking is arbitrarily declared by politicians to be wealthy, it is a necessary precept to natural law that a man’s earnings are his property. To the extent government intrudes on his financial property in the form of taxation, it intrudes on his freedom.
The clock is ticking on the Bush tax cuts. For the sake of our economy, let us hope the only thing that expires in January of 2013 is Obama’s presidency.
***** State Sen. Chris McDaniel