The Bush Tax Cuts

Actually there are a couple of problems with the Bush tax cuts. The first one is that the Republicans made them temporary. They did this as part of a budgetary slight of hand. The CBO has to score bills as they are written and writing the tax cuts as temporary reduced the projected costs. Of course, they were not intended to be temporary. The Republicans intended on waiting until they were about to expire and either extending them or making them permanent. This is the sort of trickery that soured fiscal conservatives on Bush.

So, here we are with the tax cut about to expire and Democrats in charge.

The other big problem is lingering Bush Derangement Syndrome. After years of propaganda, the Democrats are not able to discuss the issue rationally. You could go up to a random group of Democrats and shout, "Bush tax cuts..." and they would reply "... For the rich."

The tax cuts were pretty much a 3% across-the-board reduction in marginal rates with a big cut at the bottom from 15% to 10%. Because the rich make more money, they got more benefit and because a large portion of the workforce (something like 40% at the time) wasn't paying any federal income tax already, they did not see any reduction.

It was a matter of faith among Democrats that as soon as they regained power they would undo the tax cuts. When they took Congress in 2006, they pointed out that they did not have enough of a majority to survive the inevitable veto so they would have to wait.

During the 2008 campaign, Obama said that he would keep some of the tax cuts - those for people making less than $200,000 per year. Many Democrats don't agree with this and want to repeal all of the tax cuts. Left-wing pundits such as Paul Krugman have attacked the Republicans for insisting that the entire tax cut package should be extended.

Krugman should know better. After eight years under the  "temporary" tax cuts, reinstating the original rates would amount to a tax increase - a big one. Krugman is the champion of putting more money into the economy. Granted he wants to see it as a controlled stimulus rather than an uncontrolled tax cut but the point is that he sees the need for the government to put more money into the economy.

So why, in heaven's name, does he want to take a big chunk of money out of the economy?

The Democrats have boxed themselves in. A tax increase, even one in the form of an expiring tax cut, is the last thing the economy needs right now. Limiting it to the undeserving rich who make $200,000 or more a year isn't much of a comfort. That's like saying that they will only break one of your knees instead of both.

Fear and uncertainty are keeping people from spending which, in turn, is crippling the recovery. Telling a group of people that their taxes are about to be raised because they are too rich is not going to induce them to spend.

In a recent report, one of Obama's economic advisers calculated that a tax increase equal to 1% GDP can reduce the economy by 3%. 

The Democrats need to get past their dislike of the rich and extend the tax cuts, at least until the economy recovers.