A number of readers have urged that I write about the federal tax increases and spending cuts scheduled to be implemented at the end of the year. This agreement, called sequestration, will end the Bush tax cuts of 2001 and 2002, increase corporate and capital-gains tax rates, eliminate some dependent deductions, and increase payroll taxes on workers.
Some call it Taxmaggedon, since it is either the largest or seventh-largest tax increase in American history, depending on whose numbers you believe. I haven’t run the numbers myself, so I will split the baby and call it the 3.5th-biggest tax increase in American history.
Unlike many, I believe that now is the time to go ahead with this tax increase. That’s not because I think it won’t tragically damage the economy and raise unemployment. It surely will. Rather, I believe we ought to raise taxes to finally end the soothing falsehoods that surround our tax policy—especially what are called the Bush tax cuts.
One brilliant aspect of the Bush tax cuts is that they are virtually impossible to repeal. The cost of this legislative stalemate, however, is endless demagoguery and a repeated demonstration of public innumeracy.
The facts make clear why this is so: The Bush tax cut reduced taxes for the “rich,” who, in this context, include all households and all non-corporate businesses making more than about $50,000 per year. More-wealthy households saw smaller-percentage tax cuts than less-wealthy households.
Perhaps some of these households and businesses used the extra money injudiciously by buying cars and refrigerators or hiring workers. It is hard to know for sure. But the tax cut wasn’t just for the jet-setting elite.
The Bush tax cuts also eliminated personal income taxes for those making less than $48,000 in a typical household or business. That is about 50 percent of all Americans, of whom about half were paying income taxes before. So the Bush tax cuts eliminated all income tax liability for about a quarter of Americans.
The simple arithmetic truth is that the Bush tax cuts made our income tax system more—not less—progressive. Not everyone can deal with this middle school math, so they need a demonstration.
I believe a large tax increase in December will have a much-needed clarifying effect on the role of tax policy.
Moreover, ending the Bush tax cuts will mean that about one in four American households that currently do not pay income taxes will start. These folks are fed a steady diet of untruths about the Bush tax cuts, and a large tax increase in December will starkly clarify tax policy in America for them. It will also let us get down to some serious government spending that has been so lacking of late.
Now, I don’t follow politics closely, so I don’t know which party these new taxpayers tend to support in elections. But I do have an idea whom they’ll favor by the end of January.•
Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at email@example.com.