Funding A Tax Break With Borrowed Money?

Who does not like the idea of lower taxes? No matter how progressive one is, all the liberals I know will agree with their conservative friends that lower taxes are better than higher taxes, right? Particularly when you are talking about those that you have to write a check to pay. No responsible person would unnecessarily pay higher taxes if given the choice to not do so.

But what is Congress preparing to do? Extend a “tax break” for two years, and using more borrowed money to pay for the expenses that they are unwilling to reduce in the meantime. Does that make sense? Of course it does not.

Thinking about your own company budget, would you purposely postpone a price increase to your customers for your product for two years when you knew the real price of manufacturing it was higher than the price you sold them? Of course you would not do such a foolish thing. Would you lower the price if you could borrow money to cover your cost instead? Heck no, because eventually you would still have to pay it back. Better to face the painful choices sooner than later.

This tax compromise represents financial havoc, but it’s what Congress is doing by extending tax cuts for all U.S. taxpayers for another two years without lowering expenditures a like amount.

I know the arguments about rising taxes in a very weak recovery period. I know about the importance of stimulus spending at this time to avoid a worsening economy, and to give the recovery a fighting chance. I can argue both sides of most of these disagreements.

But I don’t know how responsible people can honestly make the case to not allow a more progressive tax rate be reinstated to gather revenues among the highest incomes who are not recirculating these funds in the economy. These extra tax revenues could pay for the extension of unemployment benefits – that go directly back into the economy in the form of rent and groceries – and lower the deficit with the remainder.

Raising taxes for the households with income over $250,000 would not slow down the economic recovery.   Raising taxes on the households under $250,000 would immediately be felt at the local malls, real estate market, and non-profit community, and would hurt the recovery.

But instead, the can is kicked down the road for two more years, and our federal deficit will grow nearly another $1 trillion.

Clearly, the lack of meaningful leadership places all of us in a precarious economic environment that keeps getting closer to a breaking point. The deeper we dive, the more painful recovery will be.

Think about the housing bubble that wreaked the U.S. economy in 2008. Many of the homebuyers that crashed were criticized for borrowing more money and buying more a house than they could afford.  Many of them were depending on the expectation of continually escalading home values and rising wages to eventually earn out of the hock they were in. No one blamed the banks lending the money. Similarly, we are watching Congress place our financial future in peril and no one (i.e. taxpayers) is screaming to stop Congress.

In defense of lower rates, I hear many apologists (those with the most to gain from lower rates) repeat the tired old serenade about how these funds will be used to invest and create jobs! It is a refrain from those ascribing to the “Laffer Curve,” named for economist Arthur Laffer who asserted that lower tax rates allow higher income earners to invest more savings, spend more disposable income, and accordingly create more jobs. The supposed effect on lower income earners is that these behaviors “trickle down” economic benefits to them in form of more employment and better wages.

The Laffer Curve didn’t prove to be accurate after either the Reagan tax cuts or the Bush tax cuts. What did work was a balanced approached during the Clinton Administration years where tax rates were set at a level that still provided plenty of incentives for investment (top bracket capped at 39% and lower capital gains rate), and spending was controlled to live within that revenue.   Any new expenditure had to be paid for within an established framework matching revenues with expenses.

What were the results? Three years of balanced budgets.

It’s time we got back to some honest economics that results in real progress toward mastering an unsustainable fiscal deficit caused in part by unsustainable and artificially low tax rates.

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