Will the Bush Tax cuts affect your taxes? MoneyBlogNewz/Flickr.com/CC-BY

The Bush tax cuts are scheduled to expire Dec. 31. The Obama tax plan would extend for two years the Bush tax cuts for everyone except those who make at least $200,000 a year. Republicans say raising taxes on the rich will stifle economic recovery. Obama says he can’t reduce the deficit and offer tax breaks for the rich. Some analysts say the Obama tax plan won’t make a difference in reducing the deficit, while tax cuts in general won’t help the economy. But the debate is suspended for now. Democrats who say they support the Obama tax plan are too afraid to vote on it before the November elections, lest they be crucified at the polls for raising taxes.

A closer look at the Obama tax plan

Obama’s plan to raise taxes for the rich may not sting as much as Republicans claim. Bob Williams at the Christian Science Monitor took a close look at the details. He writes that to ensure no one making less than $200,000 gets a tax increase, the Obama tax plan extends the 28 percent bracket. This cuts taxes for even the richest taxpayers by a few hundred dollars. It also provides a small cushion against higher taxes for people just over the $200,000 threshold. The Tax Policy Center said only 1.7 percent of households will pay more under the Obama tax plan than if Congress extends all the Bush tax cuts. Williams wrote that the reason nearly 95 percent of that 1.7 percent would pay more isn’t because of ordinary income. They get hit when the tax on capital gains and dividends goes from 15 to 20 percent. If a Republican stalemate lets the Bush tax cuts expire, the top dividend rate hits 39.6 percent.

Why tax cuts could be the wrong idea

Tax cuts of any kind are not the way to solve the economy’s problems, according to Diane Lim Rogers writing on CNN. Rogers said extending the Bush tax cuts or implementing the Obama tax plan commits the U.S. to many more years of lost revenue, an increasing deficit, reduced saving and limited economic growth. While Obama says raising taxes on the rich will save $700 billion over 10 years, the savings is just a fraction of the $2.2 trillion cost (not including interest) of extending the Bush tax cuts for everyone else. Lim Rogers writes that deficit-financed fiscal policies (read economic stimulus) have a bigger bang for the buck in terms of boosting demand for goods and services and creating jobs. Most importantly, she writes, a temporary extension of the tax cuts won’t solve the long-term deficit problem. This is because the U.S. government can’t be trusted to let expiring tax cuts expire–as it is proving now.

Americans lack financial literacy when it comes to taxation? Really? (Photo Credit: CC BY/Pargon/Flickr)

Turn out the lights, because nobody’s home when it comes to the taxation necessary to generate revenue for essential services across the board. That’s what Paul Krugman writes in the New York Times, and it may be that such concerns are falling on largely deaf ears in America. Cities shut off streetlights that would help curb crime, roads local governments had already spent a great deal of money on but can no longer afford to maintain are intentionally broken down into gravel and schools are laying off teachers at every turn. Cutbacks are the norm, yet scores of people from tea parties to corporate boardrooms continue to bury their heads in the sand when it comes to tax increases.

Governments are cash strapped; where’s the taxation?

While various economic theories exist regarding taxation, it is difficult to dispute that tax increases could help local governments provide more reliable essential services. Krugman points out that the federal government “isn’t cash-strapped at all,” considering that they’re more than willing to sell inflation-protected long-term bonds at only 1.04 percent interest. Thus, they should be doing more to aid local governments. The sense of priority is in effect warped, says Krugman. The richest two percent would apparently rather watch Rome burn than pay more taxes as they did during the Clinton administration – when the U.S. last experienced an economic boom.

Cutbacks equal higher unemployment

State and local governments are spending less on nearly everything, which does not bode well for families. Now that federal spending is actually beginning to slow down, Krugman sees an America stuck in reverse. Give a teacher their job back and that assaults runaway unemployment numbers directly. Allow millionaires to keep more of their money and while that could translate into job creation, there’s also a definite possibility that the Chicken Little “sky is falling” mentality will prompt the rich to stash their money away.

Demonizing the public sector

There is a definite belief that the public section cannot manage money to spite itself. Tea party anti-government, anti-taxation rhetoric has been couched in terms of avoiding waste and fraud. Krugman argues that there was never so much waste as the right claimed, however. Witnessing how much ground America has lost in terms of education and infrastructure should be enough evidence to suggest that America is not in fact sidetracked by oppressive taxation. On the contrary, “America is now on the unlit, unpaved road to nowhere,” writes Krugman.

Sources:

New York Times

Taxation, inflation and war (Courtesy of the Mises Institute)