Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

“There is no maxim, in my opinion, which is more liable to be misapplied, and which, therefore, more needs elucidation, than the current one, that the interest of the majority is the political standard of right and wrong.”     James Madison

December 13, 2010

Not Extending The Tax Cuts *IS* A Tax Hike

by Brad Warbiany

Policy proposals are often advanced in very abstract terms. This is true, undoubtedly, of taxes. Tax rates are seen as numbers on a Washington policy chart rather than what they really are — the amount taken out of every individual person’s paycheck every day of every year.

I hear the refrain on the left that letting the Bush tax cuts expire isn’t a tax hike. It’s just “going back to the rates of the Clinton era.” In one sense, what they say is true. The Bush tax cuts were temporary reductions that had a deliberate sunset (not by the desire of Republicans in 2001/2003, but by political design and political rule). Yes, you can make the argument that because this was a temporary cut, letting it expire isn’t a tax hike.

But this fails to recognize that for longer than six years, Americans have been adjusting to the current tax rates. This is now the “normal” rate. Most have carried these rates through multiple jobs. Many have carried them through home purchases / refinancing, through multiple cars purchased or leased, have brought kids into the world and put others through college. They’ve lived their lives for over six years based upon a certain expectation of income every paycheck.

And if the cuts aren’t expected, that expectation will not be met in January.

You can make every argument you want about this being purely a return to Clinton-era tax rates. That argument will ring hollow on payday. That argument fails to recognize that to every American, this is going to feel like a tax hike. Whatever it’s called in the Capitol, our wallets will be lighter than we’ve become accustomed to, and on Main Street that’s called a tax hike.


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8 Comments

  1. The tax cuts were Temporary to begin with. It was supposed to be a temporary “stimulus”. Extending the tax cuts will be a tax cut compared to the regular rate which should have taken effect.

    So extending the tax cut is a tax cut, not extending the tax cut is a tax increase. Hmmmm… how can we neither increase nor decrease taxes using this logic? I think this shows that the argument is absurd.

    Tax cut or not.. we have to look at the future of our country. American government needs a stronger fiscal position, not just to remain solvent in the long term but also to be able to compete with emerging economic threats like China. History has shown that irrespective of party politics, we do not have the political and social will to cut spending, and we are in massive amounts of debt.

    Since the majority isn’t willing to accept cuts to services (eliminating medicare and medicaid, privatizing all interstate highways, cutting military spending, etc) – we can possible cut government spending a little bit, but not a while lot. So lets assume the base case scenario that the spending does not go down (as has been the case for last 50 years). How does America pay it’s debts? When we go to fight multi trillion dollar wars, who is supposed to pick up the tab?

    Everyone including myself hates paying taxes, but do you want the next generations to be assuming a bigger debt burden?

    Comment by Neil — December 13, 2010 @ 5:37 pm
  2. The plan seems to be: borrow until the credit card maxes out and people with real wealth (including the Chinese government) stop buying federal bonds. On a parallel track, inflate the money supply so that Uncle Sam can pay back maturing bonds with money that’s worth less.

    The feds are now close to 100% debt to GDP ratio. Unfunded liabilities like entitlement programs and discretionary spending on defense are the biggest portions of these liabilities. Any amount of taxation will not be enough to offset the multiple trillions coming due.

    The problem is the SPENDING.

    And there is indeed no will to reduce that….yet.

    Comment by Akston — December 13, 2010 @ 10:19 pm
  3. So extending the tax cut is a tax cut, not extending the tax cut is a tax increase. Hmmmm… how can we neither increase nor decrease taxes using this logic? I think this shows that the argument is absurd.

    Neil, you’re responding to an argument never made in the article. To put it in summary for you here:
    – Let the Bush tax cuts expire = Tax hike
    – Don’t let the Bush tax cuts expire = No tax hike

    Now given the fact that tax revenue always seems to hover around 19% of GDP no matter the tax rate, the argument that preventing a tax increase is going to somehow make the deficit shrink is absurd. Hike the rates, behavior will change and the government will end up with no more (maybe even less) tax revenue than before.

    The only thing that has ever caused a deficit, or will ever cause a deficit, it *spending*. All it would take to eliminate the federal deficit is a 4% per annum spending cut over the next ten years. Four percent a year is not a lot, yet when the greedy bureaucrats and a compliant media are able to paint smaller-than-expected increases as “budget cuts”, it can sure seem like it.

    Imagine having this conversation:

    You: “Yeah, I got hit with a big salary cut!”
    Friend: “Yo, what happened?!”
    You: “I was expecting a 20% increase, but I only got 5% instead! This is bull$#!^ man!”

    That is pretty absurd, isn’t it? Yet every year, hundreds of federal and state bureaucracies sell this exact same line to the media, which then trumpets the terrible “budget cuts” the poor dears are forced to endure.

    Put simply, the political climate is not yet primed to address the fact that all deficits are due to spending. The battle to change this is only just beginning. Change will come as more Americans realize that the “other people’s money” they want to spend is actually *their* money.

    Comment by Quincy — December 14, 2010 @ 1:13 am
  4. Neil,

    The tax cuts weren’t “supposed” to be temporary, and weren’t sold to the American people as a temporary stimulus. If our economy needed 7+ years of stimulus, especially through the whole high-flying housing bubble of the mid-2000′s, we’re in worse shape than I thought!

    The tax cuts were temporary by political necessity. The Republicans couldn’t get enough Democrat buy-in to make them permanent, so they made the compromise to put a sunset in rather than forgo the cuts entirely. Everyone knew it was going to have to be addressed, but I think the Republicans [rightly] believed that people, having gotten used to the lower tax rates, would view a failure to extend as a tax increase [as I do].

    By the way, you’re worried about a strong fiscal position, but why is it that in just the Bush presidency, GWB was the first president to preside over a $2T budget, and yet at the same time was the first president to preside over a $3T budget. And under potentially 8 years of Obama, it’s quite possible to reach $4T, considering we’re hovering at about the $3.5T right now.

    You’re worried about the revenue side of things… But how can anyone justify the government spending of a country more than 200 years old rising by 50% in a mere 8 years, with the potential to rise 100% over 16 years?

    Comment by Brad Warbiany — December 14, 2010 @ 6:58 am
  5. CNBC interview today at 4:15pm EST with Ron Paul:

    http://www.youtube.com/watch?v=2dnOTyUO5EM

    Bartoromo: “Okay so the Federal Govt, we’ve got this tax cut extension. What is the outlook for final passage …?”

    Paul: “Well, it looks like the tax package probably will pass, but that won’t make the economy better, could make it worse, the economy could get worse whether you pass it or not…”
    ———————–

    No, R. Paul is not The Oracle or anything, but obviously he hangs around Congress and stuff, and he seems to see that it will pass (at the very least his House), then it likely will.

    During the same interview he also kind of casually mentions that the bond market is going to crash (at 2:16), and that the US Dollar will see its world reserve currency status end (at 3:14)

    Comment by procopius — December 14, 2010 @ 4:09 pm
  6. I basically agree, Brad, but someone recently phrased it in a way that made me pause.

    The extension on the table is for how long, 2 years? That’s not long enough to get the long term fiscal benefits of a real tax cut, but at the same time it significantly adds to the deficit as much as any pork buffet would. From a practical perspective, that makes the bill tantamount to Yet Another “Stimulus” Bill.

    So the pragmatist in me opposes the bill, but at the end of the day, I’ll support the tax cut extension due to my “starve the beast” principles.

    Comment by Jeff Molby — December 14, 2010 @ 7:18 pm
  7. Jeff,

    I’ve given up on the “starve the beast” analogy. I prefer the “don’t give the junkie his fix” analogy.

    The gov’t isn’t a beast with a satiable appetite. It’s an addict that will ALWAYS look for the next hit, and each additional fix only deepens the hold of the addiction. The gov’t isn’t a recreational user. It’s an addict.

    The only outcomes of addiction are quitting or succumbing to an eventual death. I don’t see either option as particularly palatable, but until it goes one way or the other, I don’t want to be the enabler. I really don’t give a shit any more which way it goes, as long as I manage to ensure that as little of it as possible comes out of my hide.

    Comment by Brad Warbiany — December 14, 2010 @ 11:35 pm
  8. I’ve given up on the “starve the beast” analogy. I prefer the “don’t give the junkie his fix” analogy.

    The gov’t isn’t a beast with a satiable appetite. It’s an addict that will ALWAYS look for the next hit, and each additional fix only deepens the hold of the addiction. The gov’t isn’t a recreational user. It’s an addict.

    Very true.

    Comment by Jeff Molby — December 15, 2010 @ 3:44 am

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