Damage from the Bush era tax cuts on the rich continues to mount

It's often said that those who cannot remember the past are doomed to repeat it. A potentially helpful variation of this adage for the present might go something like this: "Those who cannot remember the past (even from just a few years ago) are doomed to be snookered by ideologues selling the snake oil of trickledown economics."

Compare, for instance, the following news story "lead":

"September 27, 2000

WASHINGTON (CNN) — President Clinton announced Wednesday that the federal budget surplus for fiscal year 2000 amounted to at least $230 billion, making it the largest in U.S. history and topping last year's record surplus of $122.7 billion….

In June, the administration predicted the surplus would be $211 billion, and would increase by as much as $1 trillion over the next 10 years.

"The key to fiscal discipline is maintaining these results year after year. We need to put our priorities in order," Clinton said."

with this one…

"July 28, 2008

WASHINGTON (CNN) — President Bush's budget chief blamed the faltering economy and the bipartisan stimulus package for the record $482 billion deficit the White House predicted for the 2009 budget year.

Jim Nussle, the director of the Office of Management and Budget, said the deficit would be about 3.3 percent of the nation's gross domestic product, the measure of the nation's total economy."

Learning from the past

As Americans debate the state of the economy and our mounting national debt, here are some basic facts to remember and consider:

Like President Obama, President Clinton inherited huge budget deficits. By the end of his term, however, he had helped turn them into surpluses and actually begun to pay down the federal debt. He accomplished this through a combination of avoiding expensive overseas wars, keeping a lid other federal spending and, most importantly, achieving a responsible budget-balancing tax package.

Unfortunately, President Bush followed this period of genuine success with a perfect storm of terrible fiscal decisions that included: launching an enormously expensive war of choice in Iraq and, most importantly, slashing federal taxes at almost the worst possible time. Of the exploding deficits that had reemerged by the end of the Bush term, almost half (48%) were attributable to tax cuts and more than a third (37%) were attributable to defense, homeland security and international spending. Despite conservative mythmaking to the contrary, only 17% of the reemerging deficits at the end of the Bush term were attributable to "entitlements" and domestic discretionary spending. Over the next decade, $7 trillion in federal deficits will be directly attributable to the Bush tax cuts and wars.

Since 2009, the Bush policies have really taken their toll. When combined with the huge impact of the housing bubble-led recession, they have caused deficits to soar to record levels. Entering the presidency as he did at a moment of true crisis, President Obama has truly found himself "behind the eight ball." With the economy in freefall, 2009 was no time for a general tax hike to close the deficit. Meanwhile, however, the deficit and federal debt have continued to grow. While not an immediate threat to national economic health or security (the country ran a much higher debt as a percentage of Gross Domestic Product at the close of World War II) it is not a problem that can be deferred indefinitely. According to projections from economists across the spectrum, the federal debt will grow to truly unsustainable levels in the coming decade if action is not taken,

So, what to do?

The solutions available to the President and the Congress are not terribly numerous – especially given the situation in Iraq and Afghanistan. This year's passage of health care reform was an important first step toward controlling the growth of domestic spending, but given the magnitude of the challenge and the fragility of the economy, lawmakers must do more without slowing the recovery.

Fortunately for the President and the country, at least one viable and effective option is immediately at-hand. At the end of 2010, the Bush tax cuts on the wealthy (families making over $250,000 per year and singles making over $200,000) are scheduled to expire. If leaders allow this expiration to go ahead as planned, the federal deficit would be immediately slashed by $40 billion in 2011 and as much $826 billion over the coming decade. Not only would this provide an enormous boost to deficit reduction efforts, but it would also free up dollars for more effective economic stimulus programs.

Unfortunately and not surprisingly, conservatives and well-heeled lobbyists who helped foist these ill-conceived cuts on the country in the first place are clamoring to make them permanent (though their fallback position is to extend the cuts "temporarily" until, they hope, a more conservative congress is in place). In keeping with their well-worn playbook, these groups and individuals argue that tax cuts for the rich will eventually "trickledown" through the economy to benefit lower and middle income people and that expiration would hurt "small business" and hinder economic recovery.

In truth, of course, each of these arguments is demonstrably false.

On the "trickledown" theory – If this tired old line of reasoning had any merit, why has the nation seen almost constant growth in income gaps during the last few decades as taxes have fallen on the rich?

On the effect on "small business" – Repeal of the Bush tax cuts on the rich would have no effect on the vast majority of American small businesses since relatively few have take home incomes above the thresholds. Indeed, according to a May report from Citizens for Tax Justice, "Only 3 to 5 percent of small business owners are wealthy enough to lose some of their tax cuts under President Obama's proposal." Moreover, of those that would be impacted, the small bump in taxes would only apply to their take home income (i.e. the money they take in after paying employees, buying new equipment, etc…).

On the impact on the economic recovery – This is perhaps the most ironic of the conservative arguments. Having spearheaded the creation of the current economic and fiscal crises via their mad rush to limit public oversight of corporate behavior and bestow tax breaks to the wealthy, conservatives now have mustered the gall to argue that we dare not change course lest we damage the economy!

The nonpartisan Congressional Budget Office recently made clear the fallacy of this argument. As reported by the Center on Budget and Policy Priorities just this week:

"CBO examined 11 options to stimulate growth and job creation and found that extending the 2001 and 2003 tax cuts in general came in last in effectiveness. CBO concluded that a job-creation tax credit, funds to help states balance their budgets with fewer cuts in services and tax increases, and extended unemployment insurance benefits would all generate more jobs and growth on a dollar-for-dollar basis.

Furthermore, CBO indicated that extending the tax cuts for high-income households in particular would rate even lower in effectiveness than extending all of the tax cuts. This is because, as CBO explained, ‘higher-income households … would probably save [rather than spend] a larger fraction of their increase in after-tax income.' An economy in a recession or the early stages of a recovery needs more spending, not more saving."

In other words…

If history and common sense have taught us anything, it's that the last thing Congress, the President or anyone who cares at all about the U.S. economy or the solvency of the government should consider in the coming months is extension of the Bush tax cuts on the rich. Let's hope people are paying attention.