Let the ‘Bush tax-cuts’ expire?

It is interesting that Alan Greenspan wants all of the Bush tax-cuts to be repealed. This puts him, a self-described ‘Republican libertarian’, to the left of President Obama, who wants that those making less than $250,000 should not experience any tax increase.

Ironically, these tax-cuts had his implicit backing as the Chairman of the Federal Reserve then, although Mr. Greenspan justifies that endorsement because there were “surpluses as far as the eye could see” at that time.

One must understand that these budget surpluses were as a result of a modest tax increase under President Clinton, as well as the ‘pay-go’ rules (which require that tax-cuts or new spending should not add to the federal deficit) adopted as part of the 1990 budget deal between President George H.W. Bush and the Democratic-controlled Congress. When Mr. Clinton left office, the budget had been balanced for the first time in four decades, there was a surplus and the DJIA had increased almost five-fold during his presidency to over 10,000.

Eight years of the ‘second’ President Bush took that flourishing economy and landed it in a tailspin. With a balanced budget and a surplus when he assumed office, the state of the economy was at its worst since the Great Depression. What happened?

Firstly, Mr. Bush enacted across the board tax-cuts in 2001 and 2003, and scrapped the ‘pay-go’ rules with a Republican-controlled Congress. He did this despite the need of increased expenditure required by expanding the government (Homeland Security) and conducting two wars. To hide the financial effects of these wars, their expenses were kept off-budget.

While the current state of economic affairs is more complex to simply explain away with the ‘Bush tax-cuts’, the fact is that the revenue so lost is a major part of the current budget deficit. It is rather paradoxical that Republicans (and some Democrats), who want no budget deficits and are opposing things like the Healthcare Reform for its cost to the Treasury, are wanting these cuts to be extended.

On this, I agree with Mr. Greenspan. All the cuts enacted by Mr. Bush in 2001 and 2003 should be repealed. Further, something should be done to collect taxes from the almost 50% of Americans who pay no tax at all. The allegations that this will hurt small business is simply an eyewash. To help those seriously affected by the current conditions, Congress should extend the unemployment benefits for another year or more, until the economy improves.

One just has to look across the pond where the conservative Prime Minister, Mr. Cameron, is including tax-increases to spending cuts to tame Britain’s budget deficit.

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UPDATE 1: In his piece in Newsweek, Fareed Zakaria makes similar arguments. It is a great read.

UPDATE 2: Two Secretaries of the Treasury appeared on ‘Fareed Zakaria GPS‘ program on CNN on 8 August.

  1. Paul O’Neill, the 72nd Secretary of the Treasury in George W. Bush’s first term, was against the tax cuts and was fired for disagreeing with the President. His reasoning was that the war in Afghanistan and the impending war on Iraq (at that time) does not allow the luxury to have this precipitous decrease in revenue that will ensue. He also argued that the entire tax-code should be reformed; $400 billion go uncollected every year, and $300 billion are spent on collecting taxes.
  2. Robert Rubin, the 70th Secretary of Treasury for both terms of Bill Clinton, agreed that the Bush tax-cuts should not be extended, but for the time being, say two years, those making less than $250,000 should be spared. Mr. Zakaria said that this would cost $250 billion of uncollected taxes. Mr. Rubin wants that the estate taxes should be put it place immediately, since they are none right now. He emphasized that letting the Bush tax-cuts expire would only let the taxes go back to what they were when Mr. Bush took office, and not an actual increase.

I tend to agree with all the recommendations above; I wouldn’t mind giving those making less than $250,000 (98% of all Americans) a temporary break until the economy recovers.

There was also a talk of introducing a consumption tax, like the European VAT (Value Added Tax), during the show. Doing so will provide the government with an alternate source of revenue, without having to raise taxes any further than they would be after the ‘Bush tax-cuts’ repeal and would allow people to be more discretionary with their earned income.

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