Better to Have Let the Bush Tax Cuts Expire

In the immediate wake of the “fiscal cliff” deal on tax cuts, a main Republican talking point was that 84 percent of the Bush tax cuts were preserved. Barack Obama’s original position when he first started running for president was that the Bush tax cuts should be allowed to expire on their sunset date. Later, he modified his position by advocating preservation of them for individuals earning under $200,000 and couples earning under $250,000. He remained true to that position until late-2010, when he agreed to a two-year extension of all the Bush tax cuts.

A key point in Obama’s argument was that the top two percent of taxpayers should pay their “fair share” of the taxation burden; however, by agreeing to new thresholds of $400,000 for individuals and $450,000 for couples before the 39.6 percent tax rate applies, he exempted all but the top one percent, or even a little less, from the top marginal tax rate.

At the very beginning of the “fiscal cliff” talks, President Obama proposed a tax package designed to raise $1.6 trillion over ten years. According to Newsmax.com, which did a detailed analysis of the new taxation structure, the ten-year revenue increase will be $600 billion. The mean annual average will be $60 billion in new revenue, or less than two percent of the current federal budget. There will be little impact on the ongoing annual budgetary deficit and the accumulated deficit.

What President Obama and the Democratic leadership in Congress have done is to reinforce the Republican argument that taxes are evil and raising them, even in the face of huge deficit financing and unmet societal needs, is to be avoided at almost all costs. It is likely that the new taxation structure will be with us for many years to come.

One element in the new taxation structure is an increase from 15 to 20 percent in taxation of dividends and capital gains. Studies done by the Congressional Research Service and Bruce Bartlett, a former high official in the Reagan administration, have shown that there is no relationship between the capital gains rate and job creation/economic performance. Therefore, tax rates on capital gsins, dividends and investrment income should be taxed at the same rate as wages and salaries.

A far better taxation prescription for the nation would be a robust progressive taxation structure, with a top marginal tax rate of 60 to 70 percent; also, capital gains, dividends and investment income should be taxed at the same rate as wages and salaries.

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