Keep all the Bush tax cuts

Why do we want to discourage successful people from keeping their wealth in the U.S. and creating jobs?

August 01, 2010|By Peter Morici

The Bush tax cuts were a huge success, and failing to extend them for all Americans — not just families earning less than $250,000, as President Barack Obama proposes — would be a terrible mistake.

Contrary to White House propaganda, George W. Bush achieved a lot of growth prior to the financial crisis, and lower taxes for all helped. The Bush prosperity was the byproduct of several multi-decade policy trends that freed markets and empowered individuals to innovate and create wealth.

Freer trade championed by presidents since John F. Kennedy, and deregulation (begun by Jimmy Carter with the airlines) were critical to this trend. Also key was reducing excessively high tax rates on upper-income Americans, initiated by Ronald Reagan, somewhat interrupted by Bill Clinton, and reinstated by Mr. Bush.

Economists recognize highly productive people, if taxed punitively, create less wealth in the United States through arcane tax planning or simply move investments offshore. Higher taxes for high-income families would raise rates on fully half of the income earned by proprietorships and leave those small and medium-sized business with less to invest in creating new jobs.

Treasury Secretary Timothy Geithner has stated that the growth of the past several decades was unstable and riddled with crises. Yet, economists have dubbed the mid-1980s through 2007 the "Great Moderation." Fluctuations in GDP, industrial production and employment were mild, and inflation ceased to be a problem.

During the 24 months before the Great Recession, unemployment was less than 5 percent and inflation stood at 1.4 percent. Now, the Obama administration tells us we must endure higher taxes, health insurance premiums and energy prices to enjoy unemployment above 8 percent and inflation twice as high.

(Maybe President Barack Obama should rethink reregulating half the economy, when problems in only two areas destroyed the recent prosperity. But that is a matter for another column.)

It's true that China and the big banks abused the wide-open U.S. market created by free trade and deregulation. The former undervalued its currency and otherwise juiced its trade surplus with the United States, and the latter made foolish loans and disguised the risk in complex mortgage-backed securities to create big executive bonuses. The trade deficit deflated demand for what Americans make, and the credit crunch made business expansion impossible — voila, the Great Recession.

But the Bush tax cuts had little to do with the collapse, and in fact kept pre-recession unemployment low.

Mr. Obama continues the Bush policy of negotiating with China, which has yielded few meaningful results. The new banking law leaves the big banks bigger than before (still too big to fail), regulates little mortgage-backed securities, and handicaps the 8,000 regional banks that do most of the lending to small and medium-sized businesses.

The nascent economic recovery is slowing. Housing remains depressed, consumer spending is flagging, and fears of a double-dip recession abound.

Growth will get help this summer and fall from the replacement cycles on high-tech equipment, commercial trucks and other business equipment. Those have been stretched to the point that maintenance costs are too high; replacement is the better business decision.

Those forces will have played out and energy prices will be rising again by winter — that's when President Obama's repeal of the Bush tax cuts would take effect. The wiser course would be to address the budget more honestly.

The country faces a huge deficit not because President Bush cut taxes but because President Obama has made permanent much of the stimulus spending that was supposed to be temporary to combat the recession. For example, he doubled education spending and has drastically increased Washington's regulatory structures. Federal spending's share of GDP in 2011, when the president's budget assumes the recession is done, will be 25 percent more than before crisis began in 2007, even though the president is counting on winding down involvement in Iraq and Afghanistan in his budget estimates.

In 2007, federal spending was 19.6 percent of GDP and the federal deficit was $161 billion. For 2011, President Obama is optimistically projecting 4 percent GDP growth, spending at 25.1 percent of GDP and a $1.3 trillion deficit (the new health care law does not have a large effect on those figures.

Perhaps President Obama should dust off President Bush's 2007 budget and spend less, finally fix trade with China and craft policies that permit regional banks to compete with the Wall Street behemoths that thrust the global economy into chaos.

Raising taxes now would kill the economic recovery, push unemployment well above 10 percent and boot the real problem, runaway spending, to President Obama's successor.

Peter Morici, a professor at the University of Maryland's Smith School of Business, is former chief economist at the U.S. International Trade Commission. His e-mail is pmorici@rhsmith.umd.edu.

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