Over the past two years, Republican lawmakers have criticized nearly all of President Barack Obama's economic initiatives for adding to the federal deficit. Indeed, even though they recently presided over the largest deficit expansion in our nation's history, Congressional Republicans have lined up in lockstep opposition to all forms of spending and have called for increased fiscal austerity. Given their professed concern over the national debt, it is shockingly hypocritical that these supposed deficit hawks have joined the growing chorus of politicians and lobbyists calling for the extension of the tax cuts enacted by former President George W. Bush before they expire at the year's end.
In order to preserve this country's financial health, Obama should resist the political pressure he will inevitably feel from Republicans this fall to permanently extend the Bush tax cuts for the wealthy. To make the first significant dent in the nation's deficit in years, he needs to follow through on his plan to allow the cuts for the wealthy to expire as scheduled, extending tax relief only to the middle class.
Contrary to popular belief, discretionary spending on social entitlement programs such as health care, unemployment benefits and Social Security is nowhere close to the leading cause of the exploding deficits over this past decade. The true culprit is the Bush tax cuts , which accounted for 48 percent of the deficit increase; followed by increased defense spending on Bush's two overseas debacles, which composed 37 percent of the increase and social programs, which bring up the rear at 15 percent. Thus, since Obama is already winding down the war in Iraq and attempting to stabilize Afghanistan, the only remaining solution is to allow the shortsighted tax policies that created the debt to end.
Due to the ongoing recession, raising taxes across income levels would depress consumption and prolong the nation's financial woes. As such, the full benefits of allowing the cuts to expire will not be realized until a period of improved economic health. Given that an increase in the marginal tax rate of families making over $250,000 per year will not directly affect consumer spending, however, the government should raise the highest income-bracket's taxes immediately in order to begin moving the country's finances back into the black.
Even if raising taxes on the wealthy will slow economic growth, allowing the cuts to expire is still sound fiscal policy. Former Federal Reserve Chairman Alan Greenspan, who once championed the tax breaks, warned that if the economy is consigned to a sluggish 3 percent growth rate for the rest of the year, the impact of ignoring deficit concerns could be worse in the long run. The rising national debt combined with large projected deficits in future years is likely to cause a spike in long-term interest rates, chilling capital investments and limiting future growth, Greenspan said. Forcing the Americans who have experienced the most real income growth over the past decade to endure a little economic pain in the short term might save millions of others from severe economic hardship in the future.
While allowing the Bush tax cuts to expire is the fiscally responsible plan, such a decision will be a political nightmare for Obama. Not only is any action that could be perceived to raise taxes always politically unpopular, but conservatives from both parties will threaten to block the extension of any cuts causing disastrous tax-hikes on all tax-paying Americans if generous protections for the wealthy are not included.
Obama should call their bluff, though, because a gridlock that prevents the extension of lower tax rates for the middle class would be economically disastrous. Only the most insane ideologues would risk causing that level of economic harm to score a few political points.
Allowing a series of mostly popular tax cuts to expire during both a recession and an election year is a tough choice for any rational politician, but in this case, it is the right call. Tax cuts caused the lion's share of the current deficits, so reversing those policies must be an integral part of any well-designed plan to eliminate them.
Once the economy has recovered further, the government must raise tax rates for all U.S. citizens, as well as enact cuts in military spending, if we wish to erase the enormous debt accrued during the Bush years. Until then, however, allowing the Bush tax cuts for the wealthy to expire as planned is the best course of action.
