Once again there is much discussion regarding an extension of the Bush Tax cuts and for whom they should be extended. I think it helpful to keep in mind the history and the purpose of these tax cuts, including the intended method for recouping the loss of revenue and the effective ess of the result.
You will remember that we began the year 2000 with a slight budget surplus; due largely to spending cuts in certain entitlement programs and increased tax revenues due to a growing economy. In an effort to spur economic growth even further, Congress decided on an economic stimulus package in the form of a tax cut.
The decrease in burdensome taxes would allow companies and individuals to invest more into businesses and this increased investment would further spur growth.
Theoretically this economic stimulus package would cost nothing, since the economy would produce so much increased growth and therefore increased tax revenue that the tax cuts would more than pay for themselves. The Government Office of Management and Budget at the time stated that if the tax cuts were permanent they would bankrupt the country. So, to make them look more like they would pay for themselves the Congress added a 10-year twilight clause to the law. This because surely after 10 years the economy would have more than made up for the revenue invested in the tax cuts.
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As an increased stimulus to the economy the package contained 401(k) and IRA catch-up provisions that would allow the large army of baby boomers nearing retirement to exceed normal contributions limits. This in fact caused a huge increase in retirement savings.
If you were in fact one of those folks and you have courage enough to check your 401(k) balance, I believe that it is likely that you will find that although the additional contributions were of some help there was very little growth if not substantial losses to your investment. You might wonder, instead of what the government is doing with your money, what these job creators are doing with your money.
There was no great increase in merger activity during the 10-year period. During this period there were significant bonuses paid. These, instead of salary increases because economic thinking was fast becoming very short term. There was a need to invest all of this money that was coming into the market. As a result many new and arcane investment vehicles were increasingly used: mortgage backed securities, derivatives of various types, credit default swaps, etc.
We are now, as a nation, considering another economic stimulus package and at the same time watering down regulations on the financial services industry under Dodd/Frank. One stimulus package solution that is proposed is that tax cuts that will not only pay for themselves, but will generate growth and increased revenue that, with more cuts to entitlement programs will eliminate the deficit.
This all sounds like an old story. Past history indicates that stuff don’t trickle down all that well. It seems to make more sense to get the stimulus in the form of building American infrastructure and targeted tax cuts directly to a middle class who have been all but eliminated in this now 11-year disaster.
The writer lives in Murrells Inlet.