President Barack Obama found his voice last week. In a speech in Cleveland and at a news conference Friday, he fought back against Republican demands to extend all of the Bush-era tax cuts and resisted election-year pandering to antsy voters. Even as Democrats face significant losses in Congress, Obama is sticking to a reasonable plan to extend the tax cuts only for households with incomes under $250,000. That is a far more responsible approach than extending the tax cuts for the wealthiest Americans and further driving up the federal deficit.
President George W. Bush's tax cuts were irresponsible from the start, and the gimmickry to set an expiration date to disguise their cost helped create the mess left for his successor. The tax breaks were disproportionately tilted toward the rich, and it was foolish to cut taxes as the United States became embroiled in two expensive wars. The Congressional Budget Office estimates that the tax cuts cost the U.S. treasury $1.7 trillion. Bush started his presidency with healthy budgetary surpluses and left his successor with nearly double the national debt.
But with the economy still struggling to recover from the recession, now is not the time to raise taxes on middle-class Americans. Most economists agree that Americans need to keep spending or the tenuous economic growth could stall. Those in the middle-class are most likely to spend any tax savings while high income earners are most likely to save it. Obama's proposal makes the most sense for the time being, with benefits inuring to all but about the top 2 percent of earners.
Republican lawmakers are squealing about the size of the tax burden high income households will face once the tax cuts expire. But the complaints are overblown. The new tax rates won't be anywhere near the stratospheric levels of say, the 1950s and 1960s, when the highest marginal rate hit more than 90 percent. In 2011 the highest marginal rate for the wealthiest families would return to 39.6 percent — the same as when Bill Clinton was president.
And contrary to Republican claims, small businesses will not be significantly impacted. Less than 3 percent of small business filers would be subject to the higher tax rates, and many of those are doctor and lawyer partnerships.
No one likes to pay taxes. But government services have to be financed, and it makes sense to ask more of the people whom the economy has most benefited. From 1980 to 2005, people in the top 1 percent of income received more than 80 percent of the total increase in Americans' income. The modern American economy has been a boon for the wealthy and not so great for the middle class, which has seen its income stagnate and jobs disappear. As Obama pointed out in Cleveland on Wednesday, Republicans would have the United States borrow another $700 billion over 10 years in order to give tax relief to the nation's millionaires. Republicans are now calling for a tax cut extension for only two years, but that is just a short-run political tactic. A permanent extension is the true goal of congressional Republicans. And the United States just can't afford it.