Abstract
Tax cuts have always been a topic of debate between advocates of both sides: Republicans and Democrats. Those who support tax cuts have a strong point that tax cuts encourage people to invest in businesses, which brings more employment and other economic benefits. However, as we will see in this paper, tax cuts have benefited only the elite class and have brought drawbacks for lower and middle class people. Most of the tax cuts are targeted in such a way that the rich get to pay significantly less taxes, whereas tax rates for poor people change very little. The Alternative Minimum Tax (AMT), which was introduced by President Nixon, was aimed at taxing the rich even if they cunningly hide their incomes using smart accountants. However, the AMT is not adjusted with respect to inflation and tax cuts, and most of the burden falls on the middle class. To sum up, the cons of tax cuts are significantly more than the benefits.
Are Tax Cuts Good for America?
Whether or not tax cuts are good for America can be seen by the precedents of tax management set by the previous governments. In the times of John F. Kennedy and Franklin D. Roosevelt, revenue levels were high; the levels of taxes charged by both governments were higher. The level of income tax charged by FDR was at 91% and corporate taxes at about 50% of the profits. (Hartmann, 2007) The development of infrastructure during those times is commendable. Revenue from those taxes did not just disappear; it was used to create better education, hospitals, water systems, highways, roads, etc. and helped raise education standards. As government spending increased, more jobs were created, and with the resulting improvement in living standards, it was easier to raise and take care of a family. (Hartmann, 2007) All this happened when corporate tax rate and income tax rate were at 53% and 91% respectively. (Power, 2006)
When Reagan stepped into the white house in the 1980’s, income tax was cut to 27% from 70% for the rich and corporate taxes were cut down to such an extent that it represented only 9% of the total federal tax receipt (the lowest in the developed world). (Hartmann, 2007) The figure is still around the same level today. Reagan had to increase the tax paid by people earning below $40,000 annually and borrow large sums from the social security trust funds. Investment on infrastructure declined. In fact the total amount of money borrowed by all presidents from Washington to Carter combined is less than the sum Reagan borrowed in his 8 years of office! Education became so expensive to acquire that hardly any student could manage to get a degree with a low wage job, which was once a manageable feat in the 1970s. (Hartmann, 2007)
There is no doubt that there are short term benefits of tax cuts. However, the long term harms should also be considered. Advocates of tax cuts argue that tax cuts are actually productive for the economy and are a good way to give the economy a decent boost. (Messerli, 2007) Some of them claim that the money is actually going into good hands since people are better at managing resources than the government itself; high amounts of waste and unnecessary resources being used on spending is a testament to the fact that the government is not efficient in managing its services. Furthermore, tax cuts on dividend taxes improve investment in stock market and increase business investment spending. This happens because investments, which are taxed and offer low returns, become more attractive after tax cuts. It could be argued that this leads to expansion and economic growth, resulting in more jobs. (Messerli, 2007)
Defending the recent tax cuts, the Bush administration claims that this will incite economic growth. At the time when Bush became president, projected 10-year budget surplus was at $5.6 trillion. (Tyson, 2003) Some years after the introduction of the tax cuts, budget deficits have already topped $300 billion and the predicted 10-year deficit rests at $4 trillion. Increasing deficits would lead to inflation and rising interest rates. (Tyson, 2003) Even though President Bush says that the economic problems are the result of the war on terrorism, the fact is that Bush’s Tax cuts have cost a lot more and have fueled the increase in deficits. This has led to the government cutting down on national saving and investments. (Tyson, 2003)
Cutting on taxes is a huge risk at this time, especially since the government needs to focus more on curtailing problems like terrorism, education, falling health care levels, crime, infrastructure etc. At a time when government should be increasing it’s spending, cutting down on taxes and eventually increasing deficits and borrowing is very risky. (Messerli, 2007)
Most of the future income will be used in servicing the mounting foreign debt. Escalating deficits would, in the future, result in lower standards of living unless something is done to mitigate the long term harmful affects of these tax cuts. (Tyson, 2003) The problems with the tax code introduced by President Bush is that the rich are benefiting more compared to the middle class and the poor; it provides for an average annual cut of over $100,000 to people with incomes of above $1 million, $650 to people earning between $26,000 and $45,000 and even less to low-income families. (Center for American Progress, 2007)
As a result, the wealth of the rich is increasing much faster compared to middle-income and low-income earners. (Power, 2006) The government has done nothing about payroll taxes, which have put a heavy burden on most American tax paying families. (Tyson, 2003) Individual Alternative Minimum Tax (AMT) has also been left untouched which poses a significant burden on middle income earners. (Lilly, 2007) Due to reduction in dividend tax, capital gains tax and the top marginal income tax rate, the wealthy have been benefiting while the middle and lower income families suffer. (Tyson, 2003)
The middle class is dwindling in numbers while the working poor take their place. Poverty has been increasing and the median household income drastically reduced since President Bush became president, partially due to the new tax code. (Hartmann, 2007) According to recent surveys, 50% Americans agree that lower income people are paying too many taxes; for 70% Americans, their taxes are too complicated; and 60% of Americans believe that the tax code is not fair. (Center for American Progress, 2007)
There are better and less risky ways of managing taxes than the current tax code. An effective tax code would have an effect of decreasing the deficits, vitalizing the middle income earning families, and helping families of all income levels to thrive and succeed. For instance, adjusting the Alternative Minimum Tax would shift the burden of taxes off the middle class. AMT was created during President Nixon’s time to make sure that the rich would pay some of the taxes even if their income was sheltered from federal tax laws by their accountants. (Lilly, 2007) Since the AMT is not modified with inflation or tax cuts, the burden of these taxes falls on the shoulders of the middle class. Unfortunately, the white house refused to reform the AMT and instead made things easier for the rich by cutting tax rates on high income Americans and eliminating estate tax. (Lilly, 2007) Furthermore, Reforms on Child Tax Credit and earned Income Tax Credit will make the tax code less complicated and more convenient for lower income earners. (Center for American Progress, 2007) Overall, the government has actually shown fiscal irresponsibility by ensuring the welfare of the wealthy at the cost of the interest of ordinary American citizens.
References
Center for American Progress (2007, January 23) Closing the Tax Gap. Retrieved Oct 27, 2007, from http://www.americanprogress.org/issues/2007/01/tax_gap.html
Hartmann, Thom (2007, August 6) Roll Back the Reagan Tax Cuts. CommonDreams.org. Retrieved Oct 27, 2007, from http://www.commondreams.org/archive/2007/08/06/3003/
Lilly, Scott (2007, April 17) Tax Day in Bush’s America: Our President’s Alternative Minimum Tax Legacy. Center for American Progress. Retrieved Oct 27, 2007, from http://www.americanprogress.org/issues/2007/04/bush_tax_day.html
Messerli, Joe (03/04/2007) Should the individual tax on dividends be eliminated? BalancedPolitics.org. Retrieved Oct 27, 2007, from http://www.balancedpolitics.org/dividend_tax_cut.htm
Power, Max (2006, Nov 01) What’s My Take: Tax Cuts and Bad Beliefs. Associated Content. Retrieved Oct 27, 2007, from http://www.associatedcontent.com/article/77881/whats_my_take_tax_cuts_and_bad_beliefs.html
Tyson, Laura D’Andrea (Aug 11, 2003) The Bush Tax Cuts are Sapping America’s Strength. BusinessWeek. Retrieved Oct 27, 2007, from http://www.mywire.com/pubs/BusinessWeek/2003/08/11/200527?&pbl=82
