Save the Bush tax cuts

Unless Congress acts by Dec. 31, income tax rates for millions of individuals, households and small businesses will rise next year to pre-2001 levels.

These rate increases (as well as increases in several other taxes) are set to occur because of sunset provisions contained in the Bush tax cuts, two separate laws passed during the George W. Bush administration.

Most congressional Republicans support extending or making permanent the income tax cuts for all income brackets, whereas most congressional Democrats would prefer to maintain the lower rates for middle-income earners and let the cuts expire for the wealthiest filers, particularly those making more than about $250,000 per year.

Opponents of making the income tax cuts permanent for all taxpayers rely on a handful of arguments that all run into problems.

First, many of those who favor allowing rates to rise argue that making the cuts permanent for the wealthiest Americans will make it more difficult to balance the budget.

Hearing this criticism from many of the same people who have voted for the trillions of dollars in spending enacted during the late Bush and early Obama administrations is always a bit amusing — and a bit frustrating — because it ignores the fact that the lost revenue could be matched by spending cuts.

It also overlooks Hauser’s Law, which, in the words of its originator, investment economist W. Kurt Hauser, states: “Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19 percent regardless of the top marginal personal income tax rate.”

Second, opponents often claim that allowing the cuts to expire will simply be a return to the rates of the Clinton years.

This claim, while technically true, would prove false for the many Americans affected by the phenomenon of “bracket creep,” whereby people end up in a higher tax bracket thanks to inflation without enjoying any increase in purchasing power. It also ignores the fact that many people earn more in real terms than they did in the 1990s and thus would be in a different tax bracket than before even without inflation.

Third, and most exasperatingly, opponents frequently fall back on the claim that because “they can afford it,” wealthier people deserve to be taxed even more heavily than they already are.

The main problem with this argument is that it makes the disturbing claim that someone owes something to the state simply because they can afford to give it. Based on that logic, one could presumably justify the seizure of any wealth not absolutely needed for survival.

The other significant problem with this argument is its assumption that the burden of a tax increase on wealthier Americans would only fall on those whose rates would increase.

However, as anyone who has been exposed to the ideas of welfare economics knows, the burden of a given tax rarely falls solely on those who pay it.

Much of the burden of a tax increase on the wealthiest Americans is likely to fall on consumers and small business employees. This is because most small businesses pay taxes at the personal income tax rate, not the corporate tax rate.

Although politics might get in the way of sound policy on this issue, there is still hope that the lame-duck Congress will do at least one good thing this month by extending the Bush tax cuts — for all Americans.


E-mail: jarlower@indiana.edu