Government Speak on Taxes

The language used to describe the controversy and negotiations over income tax rates is very frustrating to me. To start with, talk of “extending tax cuts” is nonsense. Tax rates can be extended, but tax cuts cannot. Cuts and increases occur at a point in time and result in new rates which are either lower than or higher than the previous rates. Those rates are then in effect or “extended” until another rate change occurs.

Tax rates were reduced in 2001 and 2003 during the Bush administration. Tax rates have remained unchanged, or been extended, from then until now. Those rate cuts included a provision that as of 12/31/2010, rates would go back up to levels from which they had been cut. I think we can all agree that would represent a tax increase from current levels. So the options being faced at this time were:

1. Extend the current income tax rates which have been in effect since the Bush tax cuts of 2001 and 2003 for everybody. This would mean no income tax cuts or increases at this time.
2. Increase income tax rates for all above a certain income level (the rich?) and extend current income tax rates only for the “poor” and “middle class” whoever they are.
3. Increase income tax rates for everybody.

With a lot of political pressure and concern about the economy on their minds, the president and congress agreed on Option 1, an extension of current rates for everyone. That is probably a good idea for a couple of reasons. First, to tax something is to discourage it. So, a higher tax on incomes tends to discourage higher incomes. And raising taxes now could further slow the sluggish economic recovery we have underway.

 

The idea of the two year extension is a bad idea however, because it still creates a lot of uncertainty about what the situation will be in 2013. I would have made the current rates permanent on all earnings less than $1M a year and put in a new slightly higher bracket for earnings over $1M per year.

 

The other language problem I have with tax talk is when folks in Washington talk about “spending money” on tax cuts. Tax cuts tend to reduce government spending though the abilities to borrow and print money have dampened the effects. In any case, leaving money in the hands of the folks or companies who earned it is not a case of government spending.

 

The so-called Bush tax cuts have been so demonized that it is interesting to look at federal government revenues and expenditures during the years the current tax rates have been in effect. Below is a chart that shows that information.  While it is true that we had a deficit each quarter from 2003 on, the government revenues were increasing faster than expenditures until the financial crisis of 2008 and the arrival of the Reid-Pelosi leadership team in Congress. 

 

The declining revenue beginning in 2008 is terrible, but it’s not because of tax cuts. It is because of job losses, lower profits, less overtime, fewer work hours, capital losses, and lack of interest income, all of which reduced the taxes individuals and companies owed.

 

One other thing stands out from this chart. Tax revenue may wax and wane but government spending marches on no matter what. It has more than doubled since 2000!