Democrats, Deficits, the “Middle Class” and the Bush Tax Cuts

August 8, 2010

Right now, Washington is in a debate over whether to extend the so-called "Bush" tax cuts for all taxpayers versus allowing them to expire on those taxpayers at the very top. Democrats claim that it's fiscally responsible to let the tax cuts expire for those at the top.

The fact of the matter though is that extending the tax cuts even under the Democrats' plan adds a tremendous amount to the deficit. It's also worth mentioning that supply-siders are correct to point out that over the long-term, the tax cuts for high-income taxpayers would have a larger feedback effect than the tax cuts for low-and-middle income taxpayers, which were largely economically equivalent to writing checks (e.g., 10 percent bracket, increasing the standard deduction, and increased child tax credit).

For the past ten years, Democrats have painted a myth among a large fraction of the public that the Bush tax cuts only benefited the lucky few at the top of the income spectrum. It's simply not true. Some provisions in the Bush tax cuts may have been targeted at the very top (such as the changes to PEP and Pease and the estate tax along with the rate cuts at the very top), but trillions of dollars in tax relief went to those beneath the president's so-called "middle class cut-off" of $250,000. How do we know this? Even under Obama's plan for the expiring tax cuts that calls for only the top rates to go back up, $2.3 trillion would be added to the deficit over the next 10 years (relative to full expiration).

Overall, looking at the long-term horizon that the country's finances face, the Democratic rhetoric of the past 10 years that has helped ingrain in a large fraction of the population the myth that we can just go after the rich to solve our fiscal problems is just that…a myth. Sure, it sounds good for Democrats to play class warfare, but if they are serious about preventing the U.S. fiscal system from falling off a cliff in 30 years, they are going to eventually have to resort to supporting one of two policies (or a combination of the two):

(1) Cuts to Medicare and/or Medicaid
(2) Tax increases on those making less than $250,000

So throughout this entire debate over the Bush tax cuts, when Democrats say that they are concerned about middle class tax relief, be sure to ask them whether this concern is just temporary due to the economic situation we are in or whether it is permanent? And if it's permanent, ask them what they are going to say when a VAT, which hits all citizens, comes to the table within the next five years.


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