When are tax cuts a bad thing?

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When they pile on additional spending with no offsets, that’s when. The bill to extend the Bush tax cuts sailed through the Senate this week and is scheduled to be voted on in the House today. However, it is meeting with bipartisan resistance. Because of its very short-term nature, it does not create market certainty. It piles on an additional $300 billion in spending and makes no cuts to spending. Democrats complain that it extends the tax cuts for all, including small businesses that actually produce jobs. Some were so angry, in fact, that “F— the president” was heard coming out of the Democrat caucus.

Presidential hopeful Mitt Romney, writing in USA Today points out that the temporary nature of the extension removes much of the potential benefit for creating an environment that encourages growth.

Of course, delay now is better than an immediate tax hike. But because the extension is only temporary, a large portion of the investment and job growth that characteristically accompanies low taxes will be lost. When entrepreneurs and employers make decisions to start or expand an enterprise, uncertainty about tax rates translates directly into a reduced propensity to invest and to hire. With only a two-year extension, investors know that before their returns are realized, tax rates may be jacked up to the levels favored by President Obama. So while the tax deal will succeed in temporarily putting more money in the hands of consumers, it will fail to deliver its full potential for creating lasting growth.

Congressman Jason Chaffetz spoke to National Review about the bill. “I think the support is eroding,” he says. “The more people understand that one third of the cost of this bill has nothing to do with the Bush tax cuts, the more unpalatable it becomes.”

Additionally, Moody Investors Service predicts that passing this package without offsetting spending reductions could negatively impact the nation’s credit rating.

According to Bloomberg:

“From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth,” wrote Senior Credit Officer Stephen Hess. “Unless there are offsetting measures, the package will be credit- negative for the U.S. and increase the likelihood of a negative outlook on the U.S. government’s AAA rating during the next two years.”

The GOP has the votes starting January 5th to make the tax cuts permanent and can pass a bill without the extra spending in a straight up or down vote. Frankly, this vote could well be referenced during the 2012 elections as evidence that the GOP learned nothing from 2006 or 2008. Whether out-of-control spending comes from Republicans or Democrats, the American people are sick and tired of larded-up bills. Make the current tax rates permanent and do it January 6th – without any more trips to the trough.

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5 Responses to “When are tax cuts a bad thing?”

  1. Thomas Hurd Says:

    The tax bill should be defeated because it has, as usual, been larded up with pork that is a last hurrah of a lame duck congress. Sen. McCain made his usual anti-earmark speech on the Senate Floor today and as usual no one was listening. The congress, state and local governments still don’t get it; it is up to us to force feed them reality.

  2. JBT Says:

    Holly, there is no such thing as “market certainty”.

    Tax cuts are a bad thing when they are given to the millionaires and billionaires who don’t need them and will raise the deficit by at least 700 billion dollars if kept for the next 10 years.

  3. Ronald D. Hunt Says:

    “including small businesses that actually produce jobs.”

    Koch Industries is a $54 Billion dollar company that is classified as a small business due to how they file their taxes. The term “small business” has been so muddied that its reference has no meaning any more.

    Lowering the AFTER SALE net profit tax(that is the income tax) doesn’t create jobs. Jobs are created when money changes hands as part of an exchange for goods or services.

    Even the rich are figuring this out, Patriotic Millionaires for Fiscal Strength.

    These guys know very well that they benefit vastly more from people being able to patronise their businesses and the businesses their invested, then the tax benefits then have enjoyed sense 2001 benefit them.

    It’s very clear to these people that the 2-3 Million unemployed households receiving unemployment insurance, also represent 2-3 Million households of buying power that patronise their businesses and the businesses their invested in.

    It’s also clear to them that the 500,000 to 1,000,000 State employees saved by the Obama Stimulus also represent 500,000 to 1,000,000 house holds of buying power that patronise their businesses and the businesses their invested in.

    These guys know that the 1,000,000 to 6,000,000 jobs saved by the Auto industry bailout also represent 1,000,000 to 6,000,000 house holds of buying power that patronises their businesses and the businesses their invested in.

    These Patriotic millionaires understand that as a matter of basic policy they benefit from this Nations middle class vastly more then they benefit from changes in the marginal tax rates. And many of these small time Millionaires don’t have the same tools to hide their money in off shore tax heavens so tax increases effect them more then the billionaires so when they say raise their taxes they should be listened to.

  4. Daniel B. Says:

    It’s interesting how few people want to look at or make an actual analysis of how a bill, tax cut, or spending proposal will affect the economy in the long term. And so, by default, they fall back on their ideological predilections and assumptions. It does none of us any good.

    A good and relevant post, Holly.

  5. rmwarnick Says:

    This is what I thought was going to happen. The right-wing blogs stayed quiet on this, hoping the Democrats would be stupid enough to walk into the ambush and set themselves up to be blamed for the deficits caused by the Bush administration.

    Well, mission accomplished. The Democrats own these massive deficits now.

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