Taxes & Budget

April 15 – the income tax filing deadline – is nobody’s favorite.  There’s more bad news, though - Americans have eight more days to work this year before they can hang on to their own pay check.  According to the Tax Foundation the average American will work until April 23 this year just to pay federal, state, and local taxes.  

At the end of the Clinton administration, Tax Freedom Day extended all the way to May 3.   The 2001-2003 Bush Tax Cuts reduced the tax man’s bite back to April 16, letting American’s keep  2 ½ weeks of their own wages.  With increased salaries pushing people into higher brackets, the government’s share is climbing again. 

If the Democrats have their way, the worst is just around the corner.  Barack Obama and Hillary Clinton have been promising to wage war on the Bush Tax Cuts that benefited every tax payer in America.  Eliminating the Bush Tax Cuts has been a consistent pledge by Senate Leader Harry Reid, House Speaker Nancy Pelosi, and Charlie Rangel, Chairman of Way & Means – the committee in charge of tax policy origination. 

John Cogan, former OMB deputy director for President Reagan, and Glenn Hubbard, former chairman of the Council of Economic Advisers for President George W. Bush, are fearful of the consequences if the Democrats allow the Bush Tax Cuts to expire in 2010.  As Cogan and Hubbard explain, "Letting the Bush tax cuts expire will drive the personal income tax burden up by 25% – to its highest point relative to GDP in history.”  The following chart graphically demonstrates the fullness of the potential damage to the economy. 

Cogan is currently a senior fellow at the Hoover Institute and Hubbard is dean of the Columbia Business School.  Arguably two of the nation’s leading experts in economic policy, their very accurate, detailed explanation of the pending “tax bomb” in the Wall Street Journal is an ominous warning.  “This would be the largest increase in personal income taxes since World War II,” they calculate.

The Democrat’s rhetoric falsely claims that the Bush Tax Cuts only helped the rich, and thus letting them expire would somehow only affect “other people” as Obama and Clinton would have voters believe.  Cogan and Hubbard explain the reality if the Democrats fail to act:  “…statutory marginal tax rates will rise across the board; ranging from a 13% increase for the highest income households to a 50% increase in tax rates faced by lower-income households. The marriage penalty will be re-imposed and the child credit cut by $500 per child. The long-term capital gains tax rate will rise by one-third (to 20% from 15%) and the top tax rate on dividends will nearly triple (to 39.6% from 15%). The estate tax will roar back from extinction at the same time, with a top rate of 55% and an exempt amount of only $600,000. Finally, the Alternative Minimum Tax will reach far deeper into the middle class, ensnaring 25 million tax filers in its web.”

The federal tax burden for the last 45 years has averaged 18.2% of the GDP.  Cogan and Hubbard estimate that expiration of the Bush Tax Cuts alone would increase the federal government tax burden beyond 20% of GDP, an amount exceed only twice in the period (1945 at the end of WW II, and 2000 the last year of the Clinton administration). 

The short term implications of the Democrat agenda are troubling, but the long-term challenges are far more frightening.  The exploding obligations of Medicare, Medicaid, and Social Security alone are estimated to consume 20% of GDP within 30 years, and total federal spending to nearly 40% of GDP.

The Democrats are foisting an impossible agenda on the American people; pretending to grow government enormously with programs like universal healthcare coverage and greatly expanded spending on social programs.  They promise they can pay for it all by bringing the troops home (prematurely) from Iraq and only raising taxes on those few “wealthy rich people.”  It is not only a public policy lie; the arithmetic simply doesn’t work.  

Something for us all to think about as we survive yet another April 15, and see Tax Freedom Day pushed deeper into the calendar year.