Extend all of the Bush tax cuts

    As the economic recovery continues to decelerate and rumblings of a double dip recession have intensified we are quickly approaching the Dec. 31, 2010 expiration of the 2001 and 2003 Bush Tax Cuts.

    Without congressional action, the tax cuts on all levels of income are set to lapse with a total estimated tax increase of approximately $3.7 trillion over a 10-year period.

    A complete lapse is rather unlikely and a solution that is favored by the Obama Administration is to permanently extend the tax cuts for families making less than $250,000 per year ($200,000 individually) and allow the federal income tax rate to revert to 36 percent and 39.6 percent for high income earners, which would effect 3 percent of all taxpayers.

    Treasury Secretary Tim Geithner has been quoted as stating that keeping the current tax cuts in place “would hurt economic recovery by undermining confidence that we are prepared to make a commitment today to bring down our future debts.”

    Mr. Geithner has also argued that high income earners tend to save any tax break that they receive so any impact to the overall economy will be minimal. While the Administration’s intentions to bring down deficits by increasing taxation on high income earners may play well politically, the realities of increasing taxation on high income earners leads to decreased revenue collections for the treasury and decreased economic activity at a time when we can least afford it and the facts support this claim.

    Since 1978 the U.S. has cut the highest marginal tax rate from 50 percent to 35 percent, the highest capital gains rate from 50 percent to 15 percent, and the dividend tax rate from 70 percent to 15 percent.  Despite the decrease in the level of taxation the share of GDP that the wealthy have paid in taxes has increased from 1.5 percent in 1978 to 3.3 percent in 2007.

    Using data from the IRS to analyze the Bush Tax Cuts would show that earners making more than $200,000 per year increased their contribution of total federal income taxes collected from 42 percent of the total in 2003 to 52 percent in 2008.

    Total tax revenues collected from this group of taxpayers from 2003-2007 was $350 billion more dollars than the Joint Tax and Congressional Budget Office had originally estimated in 2003.  History has shown us that the treasury collects more in revenue with lower taxation rates on the wealthy. John F. Kennedy successfully lowered the highest federal rate from 91 percent to 70 percent and receipts from the top 1 percent of earners rose from 1.3 percent of GDP in 1960 to 1.9 percent of GDP by 1968.

    As tax rates increase, the wealthy not only tend to spend less, which depresses economic output, but they also work harder to defer and manipulate taxable income through any legal (or illegal) means necessary.  Deutsche Bank has recently forecasted a 1.1 to 1.5 percent reduction in overall 2011 GDP if the tax cuts are not extended. 

    Small Business and entrepreneurship have always been known as the driving force of the American Economy and should be generating the lions share of job creation coming out of such a steep recession. It is important to point out that according to IRS data, 48% of the net income of sole proprietorships, partnerships, and S Corporations, otherwise known as “Small Businesses”, went to filers with incomes of more than $200,000 in annual income.

    The lapse of the tax rates for high income earners is not just an increase for “Millionaires & Billionaires.” The economy has been north of 9 percent unemployment for 16 consecutive months and Washington still can not get its hands around the lack of hiring.

    When the threat of higher expenses (taxation) looms on the horizon it is easy to understand why businesses have been hesitant to put the help wanted sign back in the front window. Uncertainty tends to lead to paralysis when a business owner looks to make long term investment decisions regarding his or her business and the threat of higher taxation certainly qualifies as one of the many uncertainties that business owners are currently faced with.

    When Mr. Geithner claims that the wealthy save their tax cuts and therefore there will be minimal impact to the economy, Mr. Geithner is failing to acknowledge that the wealthy invest in their businesses, equipment purchases, employees, and other businesses. The wealthy are drivers for many small businesses in the economy such as attorneys, accountants, realtors, landscapers, clothing stores, restaurants, and countless others.

    An increase in taxation will be taking capital away from the people that are necessary to increase employment at a time when the Keynesian driven recovery has lost steam and the public has little appetite remaining for government stimulus programs. A critical component to reducing the deficit is sustainable economic growth in the private sector and returning the unemployment rate to the 5 to 6 percent range. One is entitled to argue the “fairness” of taxation rates on high income earners, but the facts of the taxation debate have proven that lower taxation leads to more tax revenue collected for the government and a more robust private sector that can hire more employees. The Independent Business Association of Wisconsin (IBAW) supports a full extension of the Bush tax cuts to ensure the prompt return of sustainable long term economic growth.

     

    Jeff Hoffman is a vice president of Judson & Associates,s.c., a Pewaukee-based commercial real estate firm, and he is acting president of the Independent Business Association (IBA) of Wisconsin.

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