Bush Tax Cuts Still Working — For Now
This column by ACRU General Counsel Peter Ferrara was published March 9, 2011 on The American Spectator website.
During President Obama’s 2008 campaign, he termed the Bush tax cuts “the failed policies of the past.” But last December, with the economy in shambles under the Keynesian, throwback, 1970s-style economic policies of Obamanomics, it was the Bush tax cuts he turned to, agreeing to extend the tax cuts for everyone for two more years. That was directly contrary to his 2008 campaign pledge to allow the tax cuts to expire for singles making over $200,000 per year, and for couples making over $250,000.
At the time I wrote in this space that the tax cut extension would allow breathing room for the long overdue economic recovery to finally sprout this year. And sure enough, that is exactly what has happened, with unemployment falling to 8.9% since then. But President Obama is now working on the Coming Crash of 2013, which will be the result on our current course if he is reelected.
Pinning the Economy to the Mat
The Bush tax cuts were scheduled to expire at the end of 2010. Allowing their expiration for singles making over $200,000 per year and couples making over $250,000 would have meant the following for these individuals, who comprise the bulk of the nation’s employers and investors.
The two top income tax rates would have increased by nearly 20%, counting Obama’s proposed phaseouts of deductions and exemptions. The capital gains tax would have increased by nearly 60%, counting the new Obamacare tax on investment income. The tax rate on dividends would have nearly tripled, counting the new Obamacare tax as well. The Medicare payroll tax would have increased by over 60% for the targeted income earners. The death tax would have risen from the grave with a 55% top rate, if the Bush tax cuts simply expired.
Yet, in 2007, even before Obama became President, official IRS data shows that the top 1% of income earners paid more in federal income taxes than the bottom 95% of income earners combined. The top 3%, to which Obama’s across the board tax rate increases would apply, paid more than the bottom 97% combined. Yet, President Obama was still committed to his left wing extremist tax piracy policy of increasing the tax rates of virtually every major federal tax on this one small sliver of taxpayers. That is why I am thinking that the Somali pirates the Navy just captured may surprisingly turn up working at the United States Treasury Department, at the Office of Tax Policy.
But President Obama’s commitment to this tax piracy did not serve him or the nation very well. Before this latest recession, going all the way back to World War II, two-thirds of a century by now, recessions in America had lasted only 10 months on average. The longest previously had been 16 months. But by December, 2010, it had been 3 years since the last recession started.
Yet, even by that December, the latest unemployment report had showed the unemployment rate increasing again, to 9.8%. That capped 16 straight months of unemployment at 9.5% or above, the longest such period since the Great Depression.
Unemployment among African-Americans had persisted during that period at 15% or above. Among Hispanics it had also persisted well into the double digits. Teenagers had suffered persistent unemployment around 25%, 45% for black teenagers. These groups were suffering a depression.
Even though technically by December the recession was declared over, historically the deeper the recession the stronger the recovery. But President Obama’s recovery was moping along at less than half the rate of prior recoveries from similarly deep recessions. By December, the economy should have been in its second year of booming economic growth. Instead, an all-time record 44 million were struggling in poverty, one in seven Americans, with over 40 million on food stamps, another all-time record.
Rebuked by the November political shellacking, President Obama finally relented in December and agreed to extend the Bush tax cuts for two years, for everyone. And that has allowed the breathing room for the long overdue recovery to now begin to sprout, with unemployment declining to 8.9% in the latest report.
But the economy still has a long way to go before traditional economic growth is restored. The labor force participation rate remains stuck at its lowest level in 25 years. With the same labor force participation as before the recession, the unemployment rate would be 11.5% today. Those who have given up and dropped out of the labor force are still not working.
This is the second time the Bush tax cuts, “the failed policies of the past,” have saved America from a recession. After the more capital intensive Bush tax rate cuts of 2003 kicked in, the economy created 7.8 million new jobs, and the unemployment rate fell from over 6% to 4.4%. Real economic growth over the next three years doubled from the average for the prior three years, to 3.5%.
Business investment spending, which had declined for 9 straight quarters, reversed and increased 6.7% per quarter. That is where the jobs came from. Manufacturing output soared to its highest level in 20 years. The stock market revived, creating almost $7 trillion in new shareholder wealth. From 2003 to 2007, the S&P 500 almost doubled. Capital gains tax revenues had doubled by 2005, despite the 25% rate cut in 2003.
The Coming Crash of 2013
But the economy today has received a reprieve, not a permanent stay of execution. President Obama, if reelected, is still pledging to impose his tax increase tsunami in 2013, which is when the Obamacare tax increases become effective in addition to the scheduled expiration of the Bush tax cuts. This will impose a hefty double whammy in increasing the tax rates of virtually every major federal tax on precisely those who create new jobs and invest in the economy.
Then there is still another major storm on the horizon. The Fed’s incredibly loose, indeed bordello-style, monetary policy first caused gold prices to start to spike. Then it caused a declining dollar. Now it has caused commodity prices to soar, with oil climbing over $100 a barrel.
For those who do not know how to read the monetary policy smoke signals, which includes everyone miseducated in Ivy League schools, that spells coming inflation. Worse than inflation for the economy will be what the Fed will have to do to stop it.
By this summer, the Fed will have worked America into a 1970s style monetary policy trap. Inflation will be surging into the 4-6% range. If the Fed continues into the 2012 election year with its easy money, zero interest rate policies, inflation will continue surging higher and higher.
But if the Fed finally reverses course with a tight monetary policy to stop inflation and restore stable prices, interest rates will at first rise. Without the Fed available to buy up federal debt with newly printed money, the government will have to bid up market interest rates further to sell its blizzard of federal bonds, bills, and notes. That will secondarily cause a downturn in the stock market.
The full contractionary effect of such monetary policies has been shown to arrive with long lag times of a year to a year and a half. The only question will then be will the resulting recession occur before the election or after. Either way, if President Obama is reelected, in 2013 the contractionary effect of his across the board tax rate increases on the nation’s employers and investors will add to the monetary policy downdraft to create one horrendous double dip recession.
But even this is not all that President Obama is doing to ensure that Coming Crash of 2013. He is carrying on a regulatory jihad against American energy production. He is shutting down drilling both offshore and onshore. We can’t even drill today in the National Petroleum Reserve! Coal and even natural gas are under assault. And despite President Obama’s occasional rhetoric, no new nuclear power plant construction is anywhere in sight in the U.S., though 60 new reactors are being built around the world, from Brazil, to Argentina, to Lithuania, to India, even Sri Lanka, with 20 being built in China alone.
In addition to the direct loss of jobs and economic production they’re causing, these policies are depriving the American economy of reliable, low cost energy supplies. The resulting rising price of energy, represented by $100 oil, is like an additional tax on the economy.
With the deficit today already at $1.645 trillion, if we suffer another serious recession in 2013, how high will the deficit soar then? Well over $2 trillion? With the Fed out of the debt monetizing business, will America even be able to borrow that much on world markets? Or will America effectively be bankrupt then, just like Greece? The European Union addressed that with a trillion dollar bailout package. But who will bail out America? Who even could try?
The Tea Party to the Rescue
This nightmare scenario can still be stopped, and America’s world leading economic prosperity restored. The first step on the road to real recovery is for House Republicans to pass a permanent extension of the Bush tax cuts, ASAP.
But that is just a small down payment on what is needed. Full reform to restore global competitiveness to the American economy requires fundamental tax reform for both the individual and corporate income taxes, establishing a flat 15% rate for both while closing loopholes. That would include a 15% capital gains tax rate and a 15% rate for corporate dividends as well. The Alternative Minimum Tax (AMT) and death tax must be abolished as counterproductive additional layers of taxation. Capital investment in plant and equipment must be allowed an immediate deduction, as under “expensing,” rather than arbitrary, stretched out depreciation.
Federal spending must then be shoehorned into the revenues produced by this tax code designed to maximize long-term economic growth. That will not be as hard as might seem, with the resulting booming revenues from a booming economy. The key to permanently balancing the budget is fundamental, structural entitlement reform that changes from the ground up how the programs work and achieve their goals. (This is explained in detail in my forthcoming book from HarperCollins this spring, America’s Ticking Bankruptcy Bomb: How the Looming Debt Crisis Threatens the American Dream, and How We Can Turn the Tide Before It Is Too Late.)
For Social Security, that means empowering working people with the freedom to choose to pay some of their payroll taxes to start in their own family savings, investment and insurance accounts to finance part of their future retirement benefits. Over time that option would be expanded so that the personal accounts can ultimately finance all of the benefits financed by the payroll tax today, replacing the payroll tax entirely. That would result in dramatic long-term reductions in federal spending, as all of those benefits would go off the federal budget, and be financed through the private sector instead. Because of the much higher long-term market investment returns, those personal accounts would provide working families with higher benefits, rather than lower benefits. The accounts would contribute further to booming economic growth with ultimately trillions in new savings and investment for the economy.
For Medicaid, that means block granting the program back to the states as was done in 1996 with the old Aid to Families with Dependent Children (AFDC) program, with astounding success. The states could then provide the poor with vouchers for the purchase of private health insurance. That would greatly benefit the poor with the same health care as the middle class, as they would enjoy the same health insurance as the middle class.
Those same block grants should be extended to all 183 of the remaining federal means tested welfare programs, estimated to cost altogether with Medicaid $10.3 trillion over the next 10 years. The states could then replace them with an entirely new welfare system providing assistance to the able bodied only in return for work. Instead of paying the poor not to work, they would be paid to work, ideally by private employers, contributing further to the economy as a result.
For Medicare, besides replacing the payroll tax with personal accounts, the rest of the program would be transformed to rely on vouchers for private insurance as well, effectively transforming the whole program into the highly popular Medicare Advantage option. The rest of federal spending should then be dialed back to 2007 levels and kept there until the budget is balanced, which would result under all of these reforms in less than 10 years.
Essential, fundamental reform of the Fed would involve ending all discretionary monetary policy, and requiring it to follow a price rule henceforth. The Fed would then tighten monetary policy when gold and other commodity prices rose, and the dollar fell, and ease monetary policy when prices started to fall.
Then all we would need is deregulation to unleash the private sector to produce the maximum of all forms of energy — oil, natural gas, coal, nuclear, even the alternative energy that is justifiable in the market. This would ensure a reliable supply of low cost energy to the economy, effectively providing still another tax cut.
This would be a prescription for another generation long economic boom, as was produced by Reaganomics, restoring the American Dream, and once again vaulting America far away into the world’s leading economy.