Could Tax Cuts Help The Economy? GOP And Democrats Debate

Allison Kade
Posted

Next week, as the outgoing members of Congress open a lame duck session, the big issue on many minds revolves around tax cuts that George W. Bush instituted in 2001, since they’re currently set to expire at the end of the year. Everyone is wondering whether they’ll be renewed across the board, or whether—as President Obama wishes—they’ll be renewed for everyone except the richest 2% of Americans. We also want to know: Which scenario has the best shot at helping our ailing economy?

Both Sides Agree…On Some Things
Republicans and Democrats are alike in supporting the renewal of the tax cuts for middle-class Americans. Congressional Republicans, however, generally support renewing all of the tax cuts, whereas Democrats point to the budget deficit and insist that the rich don’t need the extra break.


How Rich Is Rich?
Under this scheme, the cutoff for being considered part of the upper echelon of wealth is $200,000 for individuals and $250,000 for couples or families. So, whereas right now those people pay 35% income tax, they’ll have to pay 39.6% if the tax cut is discontinued.

The Republican School Of Thought
The economy is fragile, so Republicans are trying to build more jobs and keep money flowing through the system. Many feel that allowing the tax breaks to expire, even temporarily, would deal a blow to people’s spending money and stunt economic recovery, since consumer spending accounts for about 70% of the economy. Additionally, they’re concerned that letting the tax cuts expire would hurt many small- and medium-sized companies, which account for about a quarter of the American workforce: Many of those businesses are structured so that entrepreneurs pay company taxes through their own personal taxes. Republicans fear that failing to renew the tax breaks will bump small business owners into a higher tax bracket, even if those entrepreneurs reinvest most of their profits back into the business. As a result, the tax cut may kill jobs at small companies. 

The Democratic School Of Thought
Our current national debt is almost $14 trillion, and extending the tax cut would cost $3.8 trillion over ten years. Obama’s plan to limit the tax breaks for upper-income people would reduce that cost by about $700 billion. Under the Democratic plan, the majority of Americans would continue to enjoy their tax cuts—only the top 2% wouldn’t. According to The New York Times, under the current plan, households with more than $1 million in income would receive an average tax cut of about $100,000. Under Obama’s proposal, that number would shrink to about $6,300. Plus, some pundits answer the Republican concern about small business owners and job losses with the fact that less than 3% of small-business tax filers actually pay at the top two income tax levels.

 

What do you think? Will the Obama plan rob small businesses of resources and hurt the job market? Or, is it the more financially responsible choice? Tell us in the comments!

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  • http://www.aviewfromtheedge.net/blog Nicole Longstreath

    Clearly, a household making in excess of $1M a year can afford to pay more taxes than the average middle class household. We’re talking the top 2% to save our country $700 BILLION DOLLARS. If we’re not going to cut defense spending, where else will we get the money to dig us out?

  • Leda

    Absolutely, the wealthy should be taxed more and what is sad, is that they are often taxed less! Sadly, this most likely won’t happen because the rich have a lot of influence on who gets elected. They like to keep the poor and middle class too busy working to have time to figure out how they are being manipulated. “Citizens United” is an excellent example of how they are able to accomplish this.

    • Tina

      Why should you be penalized for being a producer? I understand that there is definitely more money coming into your household, but paying taxes shouldn’t be used to penalize you for earning more! I think it is inconsistent with the ideas of equality and liberty to tax the wealthier at a higher percentage to subsidize government spending which has gotten out of control. rnrnOvertaxation. This is why businesses are sending their work overseas, and why business owners are leaving California. At least in manufacturing- higher taxes they have to pay are passed directly to their customers through the cost of their products, who in turn must pass those costs onto their customers (AKA: the consumer). Its sad, but true.rnrnI think we all need to remember that we live in a democracy, not a socialist country. I think the founding fathers were quite clear in their vision for America when they created a system of checks and balances to keep the government small, and its powers in check. The problem now is that that system is broken, and the government can freely take money the YOU have earned at its will… and all you can do is complain or move.

      • http://www.facebook.com/profile.php?id=2510906 Hansoul Kim

        it’s the way you and your peers likely view taxation – why is it a penalty? you are giving back to the very society that gave you your income, the very source of your gains – how is that a penalty? like someone that only likes to take and not give, it’s a shortsighted perspective. and sadly, it’s a very pervasive one in the american society.

      • nolater than

        Equality, liberty and democracy have nothing to do with it. I know an economist, Bob Goodman, who says that democracy and free market capitalism cannot work together. He means the kind of capitalism that can do anything to anybody. I agree with him. Businesses are send their work oversears because the owners are greedy and because American industry is just a cash cow for investors. What’s going on right now isn’t really capitalism anyway. Capitalism requires competition, free entrance and free exit from the market. The big corporations are the last “people” who want to see competition. Many of these corporations have received free advertising overseas, thanks to the government; tax subsidies to help break into the overseas markets; and are hiding income in foreign banks. All we want is for them to pay their taxes. How socialistic of me.

    • nolaterthan

      You’ve got that straight. But we’ve got the vote and there are more of us if we would work together instead of attacking each other. Divide and conquer.

  • Kelser10

    I don’t agree, because my parents together make over 250,000/yr they will be considered wealthy? Yeah right…We are barely making it by especially since my dad takes care of his mother and also two house mortgages….I believe they should keep with the tax cuts all around. Just because someone is successful in what they do after over 20 years of working to get there, why punish them. They are right at the cutoff…this could hurt a lot of middle class families that are right at that breaking point.

    • http://www.facebook.com/profile.php?id=2510906 Hansoul Kim

      please think about what a family that has a fourth of what you guys make – with the same circumstances of having to take care of other family members (though probably don’t have TWO houses) – have to work with… it’s all about remembering the whole.

      • guest

        she is thinking about that family. if her parents can’t afford to spend anything because they’re already streched, if the government takes nearly half (40%!) of what they earn they can’t go shopping, and stores can’t keep as many employees, and the poorer family has no job opportunity. its all about remembering the whole…

        • http://www.facebook.com/profile.php?id=2510906 Hansoul Kim

          thanks for your reply! :) nnthey may not be able to go shopping as much as they would like, but at least they will be able to have food on the table. they may not be able to take all the memorable family trips they usually take, but they will make rent. they may not be able to spend as much on dinner outings, but they will have clothes on their back when they choose a more affordably-priced restaurant instead.nnthe meaning behind my statement about remembering the whole, is that sure, their lives will be more challenging than it’s been with these tax breaks, but they’re called “breaks” for a reason – they were being pardoned by the government at a time when people were still struggling to eat. and they’re still struggling. that’s all i mean.

  • Marie

    Thanks for such a balanced perspective on this. It’s nice to see both sides of the aisle represented!

    • http://twitter.com/amkade Allison Kade

      Hi Marie,nnI’m so glad and relieved to hear you say that! In writing this article, I was trying to be as careful as possible to present the “facts,” as such–the hardest part is that all facts can be twisted in one direction or another, and all reportage has to come from a person writing words that may or may not betray biases. Thanks so much for this comment!nnAllison Kade

    • http://www.facebook.com/profile.php?id=2510906 Hansoul Kim

      i think learnvest could have been a bit more balanced in their explanation. usually very impressed with how posts are written, and the incisive and insightful perspective, but the republican voice is much louder today.

  • Danmcn61

    Class warfare doesn’t work, and it never has. The “richest 2%” of Americans are already paying a disproportionate share of income taxes and to soak them even further will hamper business growth and reduce consumer spending. As far as the deficit is concerned, has everyone forgotten the Laffer Curve? When taxes go down, government revenues go up. It’s common sense.

    • http://twitter.com/amkade Allison Kade

      Thanks for your thoughtful comment! In case any other readers aren’t familiar with the Laffer Curve: http://en.wikipedia.org/wiki/Laffer_curve

      • Elly

        Yes, the Laffer curve exists… but at what point do we get onto the “backward-sloping” (as Paul Krugman would say) part???

    • es

      The tax cuts were meant to have a “trickle down” effect, and while business investments on behalf of the wealthy were meant to produce more jobs, they’re holding onto theirs. Meanwhile the unemployment rate is still high, and the middle class is bearing the brunt of these tax cuts for the wealthy when the nation’s infrastructure and public debt are at their worst. If the goal is to stimulate the economy, the government should follow Keynesian theory, which is to give tax cuts to the lower and middle classes.

  • Guest

    “If Democrats have their way”? That’s unfortunate phrasing.

    • http://twitter.com/amkade Allison Kade

      Hi Guest,nnThanks for pointing that out. I was trying my hardest to present a case that represents both sides, in both content and connotation, since it’s not LV’s place to take a stance but rather to spark the conversation. Certainly, I wasn’t trying to be heavy-handed with the words I chose, but I can understand how that sentence reads, otherwise. Thanks for the heads up. Where do you fall in the debate?

  • natalie

    I agree with Marie — Thank you for giving both sides!

  • http://www.facebook.com/profile.php?id=2510906 Hansoul Kim

    as much as we want to think this issue is solely about economics, it’s about humanity and fairness and justice, as well, if not more. the poorer just can’t keep getting poorer because at some point it just becomes starvation. the rich just can’t keep getting richer because at some point they just become fat cats. nnwe all know folks at the top of these hugely successful businesses. we all know they are unlikely to really give back to their peers (their human peers) in a way that is really meaningful and will help bring up the lesser fortunate class, like a selfish sibling. it is the job of the gov’t – ideally, playing the role of a wise parent of our society – to make sure that all their kids have what they need to prosper and grow to their full potential.

    • Lindsay

      A family earning 250,000 a year (with possibly the father owning a small business) are not “folks at the top of these hugely successful businesses”. And they don’t have to give back in a way that is meaningful and help the less fortunate. Do you think we’re talking about charity to help the economy? They may invest in their business or consume more for totally selfish reasons but it has a trickle down effect on the economy… That’s the point. A business owner may hire a few new workers to grow his own bottomline of the business (that’s the point remember?) It’s not to help humanity and it doesnt need to be to have a positive effect on our economy. Those couple workers just got a job to support their own families and poss. stop receiving unemployment, etc. Why is it always about punishing people who you feel don’t deserve their income, etc and why do they have to be fat cats? This is a free democratic society (or it’s supposed to be, it’s becoming more socialistic every day). We say that anyone can become whatever they want to be, rise through the ranks, earn a scholarship to an Ivy league school if they can’t afford it, etc yet at the end of the day it is our government that in fact perpetuates this lower class who are enabled to survive on gov’t payments (check the stats it’s about 40%) Not to mention that our goverment continues to create public (government) jobs that make almost twice as much as the private sector yet it only creates more and more of a deficit because unlike the private sector, it brings in no money to replace the loss (not to mention these jobs are almost impossible to lose). Our government could never survive as a private sector business which to me is really what is Unfair in this country, not that some people earn more than others. The government is not even close to being a “wise parent” more like an irresponsible permissive parent. If a real person borrowed a huge amount of money with no way of paying it back and gave it away to people in need, would you also call them “wise”, I wouldnt. I would call them irresponsible and reckless, it doesnt matter what your intention is.

    • Patrick S. Paris

      BS, America did not become great pushing equality, it became great pushing achievement.

  • Eclatnoir

    The income inequality gap in the United States is increasing very rapidly, and I’m with the other commenters who talked about “humanity, fairness, and justice” in just not really thinking that’s right. I do think, however, that there is wiggle room on the *level*. $250k, as others have pointed out, doesn’t really mean an entire household is living high on the hog. Why don’t we raise the level to e.g. $500k or $750k, and tax *those* households proportionately more? The money does have to come from somewhere, and for those arguing that there is then no incentive for those people to earn more — it’s marginal taxation, on the extra dollars over a certain point.

  • Laurnov

    Requiring the wealthiest individuals to pay a higher tax rate is not a new idea. The French Declaration of the Rights of Man and of the Citizen in 1789 and many arguments since then have aptly pointed out that a flat tax rate shifts undue burden on the poor and middle class. To all those who would argue that their parents make over $250k, are still middle class, and shouldn’t have to pay higher taxes…it’s time you face facts. People who are hit by taxes levied against the top 2% of earners are not middle class and it’s frankly insulting to imply that your family won’t be able to get by because of these tax cuts. nnThe idea of taxes being penalties is childish. A plurality of the upper echelons in Germany recently signed a petition to be taxed at a higher rate with the stipulation that the revenues be used to fund programs for the poor. Taxes are not penalties against the productive, they are the price you pay for living in society. Their use should reflect the priorities of the society you want to live in. nnLastly, I want to mention 2 things this article left out. 1) If you look at the US historical tax rates, the top tax rate from 1987 to present is the lowest it has been since 1931. US GDP shows little correlation with top tier tax rates. 2) the Democrats also propose a special exception for that 3% of small businesses that would otherwise be subject to the higher tax rate.

  • Mica

    I don’t buy the consumer spending argument. Most people are spending less…. even the top 2%. A tax cut won’t make anyone buy more crap that they don’t need. Most of the crap we buy is not necessity. My friends and family are all laying low and spending less. And they are not spending less because they enjoy sitting on a big pile of money. They are spending less because they don’t know if another string of lay-offs is coming around, they don’t know if state budget cuts will affect their ability to afford daycare, they don’t know if things are going to get better any time soon. The country is 14 trillion in debt… there is less to spend… because we’ve already spent it. And now we are going to have to pay it all back with interest. I think we should do away with tax cuts for everyone. No one wants to hear it, but getting rid of massive amounts of debt involves making payments with money you would rather spend shopping. I am still paying back my student loans. Yes, its painful. But one day, I will make that last payment and it will feel amazing. As a country, we need to grit our teeth and start living like people who are in $14 trillion dollars of debt… humbly.

  • nolaterthan

    This isn’t about taking money away from people who are investing in this country. Big corporations have been outsourcing for years despite the tax breaks they’ve been given. There is a lower tax rate on capital gains than on wages. Therefore, the rich invest in the risky schemes that have taken us to economic disaster. The rest of us have to bail them out when they get into trouble. But they don’t have to bail us out when we get into trouble because of their financial schemes. The super rich pay a disproportionate share of taxes because they have a disproportionate share of the wealth. And they still aren’t paying their share. Much of their wealth, especially in the defense industry, comes from our taxes in the first place. This is all about greed. Democracy has nothing to do with it. BTW, just because a person doesn’t make a huge salary doesn’t mean they’re not a “producer”.

  • Elly

    Ok, seriously, just because you don’t FEEL rich, doesn’t mean you AREN’T rich. If you make over $200,000 as an individual or over $250,000 as a family: YOU ARE RICH. End of story. You make more money than 98% of Americans. You are one of the richest people in the entire world. nnAlso, I think that something some people don’t understand is that whether you make $250,001 or $300,000 or $6 million as a family, the tax cuts will still apply to the first $250,000 of your earnings. So if you make $250,001, then the tax rate will increase on that last dollar, and you will pay a few more cents in taxes. If you make $300,000, you’ll pay higher taxes on the last fifty thousand–a couple thousand more dollars in taxes. If you make $6 million… well, really, you should stop complaining. This article explains it well: http://www.tnr.com/blog/jonathan-chait/78060/the-times-wages-class-war

    • http://www.facebook.com/profile.php?id=2510906 Hansoul Kim

      “If you make $6 million… well, really, you should stop complaining.” LOL. very well-put, and thank you for the clarification about the way the cuts would work. very, very good to know.

  • Sand252

    While I empathize with those who combined make $200 or more not wanting to pay 3 – 4% more on taxes, those individuals can hardly cry poverty for being overstretched. Most of those individuals have assets unlike those who make under that amount or are contributing to accumulating assets. Those who make much less, have much less to no assets and are overstretched without get much consideration. Alternatively, maybe the feds should try — and I know this idea is much harder b/c it’s redrafting a bill rather than extending it — extend tax credits to those making 300k and under or 350k and under. One cannot cry foul at those numbers. Or can they?

  • Marygray2010

    I think those in the top 2% can afford to pay the higher taxes without hardship. It is the middle and lower classes whose children go off to fight in the war, perhaps the top 2% should have to think about that.

  • Lindsay

    I think people need to shift their focus a little bit here. The point of not raising taxes on the “rich” (if you live in NYC or other high cost of living areas 250,000 for a family is not the same as where you may live) is not a matter of either punishing them or cutting them a break. Higher incomes do pay a hugely disproportionate percentage of their income in taxes while almost half our population in this country pays NO TAXES… The real point of not raising taxes on this sector of the population is again the fact that it’s these individuals that make the most investment back into our society and economy. These are a lot of our small business owners and entrepreneurs who create jobs and maintain jobs that don’t continue to add to all the jobs we’re losing in this country. So is the goal of our country to make everything “fair”, redistribute income, and punish those who earn more or is it to do things that will help put our economy back on track? There is a lot of Class Warfare going on in this country right now, at the worst of all possible times.

    • http://twitter.com/amkade Allison Kade

      Hi Lindsay, nnThanks for sharing and interesting viewpoint. I’m not very familiar with that statistic of half the population not paying taxes–mind sharing a link? Thanks!nnAllison

  • Jamesbicycle

    It is the so called rich who invest in new businesses and buy luxury items we are still as a nation in a precarious economic situation.This is not the time to raise taxes.The practice of dividing Americans by promoting the hatred of the so called rich by the poor is stupid and hurts everyone.Income too heavily taxed will be hidden sheltered or simply not striven for.The “rich” pay the most taxes pecentage wise of anyone in our country.Taxing too heavily lowers tax revenue lower rates increase tax revenue because money flows more freely through the economy.The Bush cuts should be extended for all!

  • Becky Martino

    I don’t believe that $250,000 a year is makes you wealthy. Maybe the solution to the debate is to raise the amount to a higher amount. I definitely think that the wealthy do not pay their share in the taxes. It seems that they don’t need any social programs so they don’t care if anyone else needs them. The country definitely needs tax money to operate.

  • Farmer girl

    As a small business owner, I know that any investment made in your “business” is a tax deductible item. Let’s stop the bleeding. Learn to live on less and pay down the debt. If trickle down worked, there would be no problem. The disparity is so great it cannot be ignored. Let’s go back to Eisenhower days when a blue collar worker could support his family.