Better to Let the Bush Tax Cuts Expire

11/17/2010 03:14 pm ET | Updated May 25, 2011

Just who benefits directly from the Bush tax cuts is not a mystery. The rich benefit a great deal and the poor none at all. The middle class gets amazingly little out of it. There are raw facts and then there are theories about the effects of tax cuts. The abstracts are that tax cuts affect the economy a little and the deficit, and therefore debt, a lot. Tackling the abstracts, which is where all the contention arises, requires that the math be done first.

Fortunately, the National Taxpayers Union has done the math for us. Their work, in simple table form, shows that people at or below median income pay about 2.7 percent of the income tax burden of the nation. People above median income pay the bulk of the nation's tax bill. One assumes the National Taxpayers Union is making the point that either the median income and below earner doesn't pay enough or that everyone should be more grateful to the those making more than the median for their paying the most. Or then maybe the meaning is in the eye of the beholder.

The NTU has, maybe thoughtfully, also provided a brief history of tax burdens back to the year 2000. Scroll down their table and you will see that the deadbeat median income American has been paying less and less of the tax burden year over year for at least a decade, by their numbers.

The fact that the people in the smack middle of the income curve of this country pay little to no taxes is disturbing. It is disturbing to both the rich who increasingly foot the bill and the poor who simply can't afford to pay anything. Or, it's disturbing to those that think the rich pay the most because government spends too much money. Taxes and spending are an obsession with conservatives, they appearing to not understand why there are taxes and spending at all.

The fundamental conservative axiom on taxation is that taxing an activity, any activity, will reduce the level of that activity. Taxing tobacco and alcohol consumption, for instance, will reduce consumption of alcohol and tobacco. In theory then taxing income reduces the level of income producing activity. If you are taxed too much you will simply refuse to work. If you are not taxed at all, the heavens of John Galt creativity will open and bathe us all in the glorious sunshine of Laissez Faire.

But there is more to economies than taxes, much more given current or likely levels of change in taxation in the 111th and 112th Congresses. The lapse of the Bush tax cuts, for instance, will have little to no effect on the economy but will have a significant effect on the deficit. A tax cut for those earning above $250 thousand/year has as little as 10 percent positive impact on the economy, while letting that tax cut lapse has a 100% positive effect on reducing the deficit.

Altogether, the Bush tax cuts have had no discernible positive impact on the economy. In fact, the Bush tax cuts have been in place during the worst American economic decade since 1930. While it may be true that other factors were a greater drag in effect on the economy than was any positive effect of the tax cuts, it is also true that nothing has been done to mitigate the other negative factors, e.g., trade deficits and anti labor policies and wars. If there is a net positive from tax cuts, failure to remedy the counterweights on economic growth puts us on a treadmill of deeper and deeper cuts in order to keep the economy going day by day. This will not lead to any good result, because eventually we will run out of taxes to cut. At that point we will more resemble Somalia than Reagan's "shining city."

In theory, even tax cuts for the middle class don't work to grow the economy. Since taxes are not removed from economy but are immediately spent by government, the only significant effect of taxation on the middle class is to change the way the money in question is to be spent. Government might buy a 100 new textbooks instead of a used jet ski.

Taxes on the rich are an entirely different issue. As little as 10 percent of a tax cut for the rich is returned to the economy either by spending or investing. This runs contrary to the antiquated model of business school lectures which insists that all capital is participating in the economy as some form of active investment. This may have been true in 1792 when New York Stock & Exchange Board set up in rented rooms on 11th and Wall Street, but the Dow/Jones communications empire authored a change to all that more than a century ago. These last decades' doubling of financial activity as component of GDP is made up mostly of unproductive speculation and hedging. Capital formation has lost most of its utility to the economy because there is simply so much capital laying around already that there isn't enough activity in the global economy make use of it all. The rich are the richest they have ever been at any time in history. There is literally nothing they can invest in that will make money other than gambling on things as precarious to the world as the viability of the full faith and credit of the United States of America.

In fact now, the most beneficial use of all that accumulated capital to the country, and the world, would be to use it to retire the U. S. national debt. And as the national debt is almost entirely made up of corporate welfare and profits by the exact military industrial complex of which Eisenhower warned, capped by a bailout of Wall Street in 2008, it is perfectly fair and fitting to make them pay it back for breach of promise. And if you recall, the promise was Trickle Down.

We are barking up the wrong tree entirely by imagining that lower taxes will help the economy. Taxes are not the drain and 3 percent higher taxes are a nuance compared to war, trade deficits and debt service. Every tax dollar and then some is recycled into the economy with those three practical exceptions. What will help the economy most, other than further economic stimulus, is to cut down the debt, stop the wars and achieve energy and cheap labor independence.

If we are prevented from stimulating the economy and growing our way out of this Great Republican Recession by the Republicans who put us into it, then the next best things are to pay down the debt, end the wars and tariff trade with emphasis on curtailing outsourcing to other countries. Letting the Bush cuts expire will firmly assist in tackling the deficit and the Republicans will not let any of the other options happen while they hold the House.

Letting the Bush tax cuts expire for the middle class will not materially harm the economy and keeping them for the rich will not help the economy at all and will probably damage the economy further by taking money out of the economy. The middle class is hurting and laying on further lash seems unconscionable. But the GOP put the middle class there in full malice of forethought with the political objective of leveraging their pain, as they have.

I know it's a hard sell that the middle income part of the Bush/conservative tax cut small government ideological package is a pitiful bribe, but it is. The conservatives threw a few crumbs to the middle class and walked off with the wedding banquet in 2001-03. Those few crumbs are what they are betting you will mortgage your future to keep. Democrats in Congress fear that you are willing to do so and so might extend the Bush tax cuts for the wealthy in order to keep you your crumbs. This is the state to which the once vaunted American middle class, pride and idol of the globe, is already reduced. We can be bribed with a few hundred dollars a year to preordain our future as servants to wealth.

But if you look at it another way, giving up that few hundred bucks a year that Bush bribed you with might be the best investment you can make for your country and your future. The income tax revenues of the U.S.A. are $1.1 trillion a year. About 20 percent of earners -- those making over $265 thousand -- pay 69 percent of the federal income tax bill. The bottom 80 percent of the working public pays only 31 percent. And the bottom half pay practically nothing. Looking at the tax code in a purely business sense, it makes very good sense for the lower 4 quintiles of income to let their taxes go up a little in terms of dollars in order to leverage the resources of the top quintile. The top 20 percent would then pay over twice as much as the lower 4 quintiles combined towards lowering the deficit.

Lowering the deficit will be of some economic benefit to the public in the long term, because debt service does consume a considerable amount of tax revenue. However the larger benefit to the larger public, those in the lower four-fifths of earners, is that the higher revenues, which are fungible, will flow into essential services and thus into the economy. You may then quibble as to what services are essential and how small government should be, but while you are having that argument, which is likely to go on until people all become rational, your representatives will not be running up the debt by another $370 billion a year.

But there is even more going on than just a government trying to balance a budget with the tax code. The economy is stuck in the year 2000 with financial sector expansion and no new jobs. Now, what is onerous to both the lower income and higher income public of small businessmen and professionals is that profits have become thinner while paychecks that support profits have become fewer. All while public utility sized corporations do not seem to be suffering at all. Bailed out and downsized and offshored, they have record profit margins and productivity and $1.8 trillion dollars in liquidity that is just sitting on the sidelines of the economy apparently waiting for the Reagan Rapture.

We are not in a grand funk recession because of taxes being too high or government spending being too high or deficits run amok. These things can be fixed. We are in a recession because of the deliberate small government deregulated policies of the Republican administrations of Ronald Reagan and George W. Bush, and none of tax relief or cutting government spending or deficit reduction is going to fix what ails us.

We can service our debt if we have jobs that pay, personally and nationally. Right now the only job we have is war and nobody is paying us to do that. We can pay taxes enough to support a school system and Medicare for our moms and dads if we have an income above a poverty level. The crisis we face is not even a personal debt crisis as much as it is a personal job crisis. Americans borrowed in the belief that their income and prospects would grow under the auspices of a government that could be trusted to do right by them. Not too much to ask. And now the job we thought we'd get someday is gone to Asia or Latin America. Not just the jobs of the lazy and ill-equipped or uneducated are gone, but the jobs of the cream of American workers are gone for corporate profits on the wage differentials between nations. We borrowed predicated on the progress our parents and grandparents had enjoyed and fully expected it to work out.

Instead of continuing to bask in New Deal prosperity, we are left holding a bag of a decade of disappointments and recriminations, and arguing about who will foot the bill to regain that prosperity. Well get on your highest snake boots and hardest hail hat, the answers are clear enough. If you want to pay down the debt, send the first bill to the people who ran up the debt.