Tax cuts or no tax cuts?

 

The U.S. government is facing an important decision about a particular set of tax cuts that divide the country along political party lines. These are not tax rates that affect most people, only about 2%-3% of the U.S. population. However, these are the top income earners, so the total dollar figure is more than it would be if it were a tax cut to the middle class. These are the Bush-era tax cuts that President George W. Bush instituted in his first term and are regularly supported by Republicans and hated by Democrats.

This means that this decision is much more than just a numbers game. It is a debate about Republican and Democratic ideologies and also about the message that it will send to the international community. First, let’s deal with the political aspect of this tax cut decision. These tax cuts for the wealthy are scheduled to expire at the end of this year. That means that in order to extend them after that time, the government would have to pass it and sign it in to law. If they wanted to do this then the Republican Party would likely support them. However, if they decide not to extend it, then all they have to do is nothing because the bill was not designed to automatically renew or extend itself. This point is important because it essentially gives the edge in deciding to the Democrats (as it should since they won the Presidential election).

Republicans are the party of tax cuts and small government. However, they are even more so the party of big business and wealthy individuals. Democrats on the other hand, are the party of tax and spend and of the middle class. This is the most common debate between the two parties in just about every election. Applying these ideologies to this tax cut issue, the Republicans are in favor of extending the tax cuts because they believe in tax cuts and especially, tax cuts to wealthy people. The Democrats think the opposite about tax cuts (to an extent) and support more help to the middle class rather than the upper class. Therefore, we are likely to see the Bush-era tax cuts expire at the end of the year.

Under normal economic times, this would be a no-brainer for a Democratic President like President Obama. However, we are not in normal economic times right now and because the economy is in a state of slow and somewhat fragile growth, tax increases might threaten that growth. At least this is the Republicans’ argument. Economists don’t think that the dollar figures involved will do anything to the economy as it isn’t really that much of a difference, but an economy is a funny animal because it often goes by peoples’ perception which may not always be reality. This perception can definitely be changed by the Obama Administration, but it will take a lot of interviews for the next several months.

For the international community this decision will be more symbolic than anything. The world is looking for the U.S. to reign in the large debt size it has and take its fiscal situation seriously. This is very important to the U.S. economy and the world moving forward. No one in the international community wants to see the U.S. extend the tax cuts and this will play in to the President’s decision as well.

So it turns out this tax cut is more symbolic and ideological than actually meaningful. The Republican arguments for extending these tax cuts are stronger now than they usually are due to the fragile economic times we are in at the moment. However, they still don’t make that much sense and most experts think they won’t make any dent in the economic growth anyway. If any tax cuts should be used right now, it is for small businesses directly because that is the real engine of the U.S. economy. No new tax cuts makes sense too because it sends the right message abroad and also begins the difficult process of cutting the debt. This is the choice President Obama should go with at the end of the year.