Tax the rich, soak the poor

Ending Bush tax cuts would further cripple job growth

By Geoffrey Lawrence
  • Thursday, August 19, 2010

The federal tax cuts of 2001 and 2003, popularly referred to as the "Bush tax cuts," are scheduled to expire at the end of this year. As a result, Americans will face higher tax burdens and more joblessness next year.

Despite unfounded claims from leftists that the Bush tax cuts were specifically targeted for "the rich," those who will be hurt most if the tax cuts are eliminated are working- and middle-class Americans.

Unless the tax cuts are extended, individuals will suddenly discover they are bearing higher federal income taxes, capital-gains taxes, taxes on dividends and estate taxes. Currently, six income-tax brackets assess taxpayers at progressive rates of 10, 15, 25, 28, 33 and 35 percent. The new brackets, five in number, would pay the higher rates of 15, 28, 31, 36 and 39.6 percent. 

Hence, the overwhelming majority of Americans — regardless of their place along the income scale — would find themselves with heavier income-tax burdens.

In fact, the additional income-tax burden to be imposed on the median Nevada family — those with an income of $64,910 — would be crushing. A recent analysis by the Tax Foundation points out that while such a family now pays a federal income tax of $3,351, that burden is scheduled to rise to $4,881 next year. In short, the extension of the Bush tax cuts that the current administration opposes so strongly would save the median Nevada family $1,530 annually in income taxes alone.

Of course, those aren't the only tax increases in the pipeline. Estate taxes, currently at zero percent, are also scheduled to jump to 55 percent. What's more, because estate-tax liability is to be assessed against all assets — not just bank deposits — it could force millions of workers into unemployment as family businesses and farms are forced to close. The estate tax, also known as the "death tax," will force heirs to liquidate family-owned businesses and farms to pay the new tax liability Uncle Sam intends to assess against the value of family firms. 

An econometric analysis commissioned by the American Family Business Foundation shows that 1.5 million small-business jobs could be destroyed as a result of the estate tax. To make matters worse, a 2006 study from the congressional Joint Economic Committee indicates that the federal estate tax may actually lead to lower government revenues because, among other things, it creates higher unemployment.

Capital-gains taxes are set to rise from the current maximum rate of 15 percent to 20 percent. Taxes on dividends are to rise from 15 percent to 39.6 percent. These tax hikes will compel marginal investors to remove their savings from corporate investments, such as stocks, and move them into nontaxable investments, such as government bonds — simply to attempt to safeguard their assets. The consequences for any lingering prospects of economic growth would be horrendous.

Capital-gains taxes stifle entrepreneurship and are direct obstacles to private-sector investment in new capital equipment and improving technologies. These are the very investments that accelerate worker productivity and lead to higher wages for all workers. They also allow firms to offer higher-quality goods and lower prices for the benefit of consumers.

Government tax policy that diverts investment into nontaxable government bonds shifts productive resources such as labor and capital equipment away from the market-oriented endeavors that enhance the economy. Instead, the resources go into politically determined government spending — which, uninformed by price signals, typically channels productive resources toward efforts that do not measurably increase consumers' standard of living.

Lower capital-gains tax and marginal income-tax rates encourage high-earners to employ their capital in more productive ways, leading to faster economic growth and higher overall tax revenues. IRS data shows that, between 2001 and 2007, the share of federal income-taxes paid by the top 1 percent of earners increased from 34 to 40 percent. For the top 10 percent of earners, that share increased from 65 percent to 71 percent. That's right: The Bush tax cuts actually made the federal tax code more progressive

Moreover, allowing the Bush tax cuts to expire would do nothing to address long-term budget deficits. From 2001 to 2007, total tax revenues actually increased substantially — from $888 billion to $1,116 billion. This means that the Bush tax cuts were not responsible for any explosion in deficit spending. Spending caused an explosion in deficit spending. As such, the best way to control deficits is to reduce spending, not to raise taxes.

The American Left, scorning all empirical evidence, claims that allowing the Bush tax cuts to expire will somehow promote fairness and efficiency in the tax code by punishing the rich. 

In fact, it is the poor and unemployed who would suffer most from the Left's intellectual bankruptcy.

Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute.

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