Five myths about the Bush tax cuts

[Joanne98]

By William G. Gale
Sunday, August 1, 2010

The tax cuts enacted in 2001 and 2003, known as the Bush tax cuts, are set to expire Dec. 31, and the fight over what to do is increasingly heated. Should the tax cuts expire, as some Democrats have said? Should they be extended, as most Republicans maintain? Or does the answer lie somewhere in between, as the Obama administration, led by Treasury Secretary Timothy Geithner, has argued in recent weeks?

The cuts lowered tax rates across the board on income, dividends and capital gains; eventually eliminated the estate tax; further lowered burdens on married couples, parents and the working poor; and increased tax credits for education and retirement savings. Obama's proposal would extend most of these reductions, allowing only those for individuals making more than $200,000 and families making more than $250,000 to expire.

Complicating the debate is a gloomy economic and fiscal outlook, one that is decidedly different from the rosy scenario that prevailed at the beginning of the last decade. That outlook has given rise to a number of stubborn myths about what extending the Bush tax cuts would -- or wouldn't -- do.

1. Extending the tax cuts would be a good way to stimulate the economy.


As a stimulus measure, a one- or two-year extension has one thing going for it -- it would be a big intervention and would provide at least some boost to the economy. But a good stimulus policy can't just be big; it should also offer a lot of bang for the buck. That is, each dollar of government spending or tax cuts should have the largest possible effect on the economy. According to the Congressional Budget Office and other authorities, extending all of the Bush tax cuts would have a small bang for the buck, the equivalent of a 10- to 40-cent increase in GDP for every dollar spent.

http://www.washingtonpost.com/wp-dyn/content/article/2010/07/30/AR2010073002671.html

[whyverne]

1. Allowing the high-income tax cuts to expire

would hurt small businesses.

This claim is misleading. If, as proposed, the Bush tax cuts are allowed to expire for the highest earners, the vast majority of small businesses will be unaffected. Less than 2 percent of tax returns reporting small-business income are filed by taxpayers in the top two income brackets -- individuals earning more than about $170,000 a year and families earning more than about $210,000 a year.

Liars,liars, pants on fires.

Big surprise! If you are making $200,000 or more a year you are probably not a small business. And if you are you should pay your employees more, you greedy prick.

[theoldman]

4. Here is how everyone is mistaken on the tax.

The tax is applied to the business owners income, not the business income. A higher tax on the owner has no effect on the business. No one gets layed off from the business. The owner just buys a smaller car.

[Murray_R]

5. where to begin?

"The tax is applied to the business owners income, not the business income. A higher tax on the owner has no effect on the business. No one gets layed off from the business. The owner just buys a smaller car."

Have you ever owned a business?
Furthermore, what happens to the guy who made bigger cars? Does he just get in the bread line and wait for section 8 housing vouchers since your preference for higher taxes precluded his employment opportunity?

[Selatius]

9. The thing is most small business owners never make anywhere close to 200,000 to start with.

Allowing tax cuts above $200,000 to expire would have no direct effect on a small business owner who only takes home 100,000/year.

[jmowreader]

8. It depends on how the business is structured

Sole proprietorships, partnerships and S corporations are pass-through entities--the company officially makes no money and all money that may be made from the company is reported on the owner's personal income tax return using Schedule C. C corporations file a corporate tax return and pay corporate income tax rates.

This is my thinking: If you are a small business owner and the company's total income is high enough it would push the owner into either of the top two tax brackets, the company should become a Subchapter C corporation. When this happens, the corporate tax is calculated as "total income, minus every ordinary and necessary expense in the company's operation"--and "executive compensation" is considered an ordinary and necessary expense.

So...if you've got a small business, it's a Subchapter C corporation and you're taking enough money out of it that you will personally land in one of the upper brackets, I'm happy for you...but you should still pay your taxes.

[theoldman]

2. There is no way that the tax cuts for the top 2% ever helped the economy.

Only people below $100,000 per year tend to spend extra money if they get a tax cut. Richer people save it unless they decide to buy a larger house.

[DJ13]

3. Tax cuts are among the WORST kind of stimulus that could be done

The wealthy dont buy stuff with their savings, they invest it in the markets, which does diddly squat in increasing economic activity.

[Murray_R]

6. you don't understand the role of savings in an economy

Savings do the most for an economy.
'The markets' are where people go to borrow resources to start new enterprises, or expand existing ones. This is the process that increases material well being.

If those resources are instead seized by the government in taxes and given away to fund consumption no new capital investment takes place, so there is no expanded production, only a smaller capital base on which to try and expand production with in the future.

[Selatius]

10. People don't save if they have no income or insufficient income.

If the point is to stimulate economic activity, simply doing tax cuts is insufficient. There must be things such as jobs programs, job training programs, and investment in national infrastructure. I'm not opposed to drastically cutting middle and lower class taxes to the bone, but the tax cuts on the wealthiest should be allowed to expire as a matter of fiscal expediency.

The thing is producers do not produce anything if the consumers have no income. A jobs program coupled with middle class/lower class tax cuts would make more sense in terms of increasing aggregate demand for products and services because it puts money directly into the pockets of consumers, who will then spend that money in the economy. Once the demand exists, producers will invest the necessary capital to increase production and hire more workers to meet the demand but not before that.

[OllieLotte]

7. So instread of buying more Chinese garden knomes which

really boosts our economy. Rich folks waste it on things that will make them more money. Like maybe inventory controls, computers and maybe an extra salesman.