The Bush tax cuts, which were enacted in 2003 and are set to expire at the end of 2010, have always been a point of contention. Republicans see the tax cuts as driving forces behind strong economic growth, while Democrats view them as giveaways to the rich at the expense of everyone else. After the Democratic Party successfully captured both Congress and the presidency in 2008, letting the tax cuts expire was seemingly a foregone conclusion. But as tough economic conditions remain unimproved and the prospect of a November’s defeat becomes more plausible, President Obama and democratic leaders are having second thoughts with regards to the Bush tax cuts. Will discontinuing the tax cuts help or hurt the U.S. economy?
It is generally accepted that the Bush tax cuts were designed to benefit corporations and high-income Americans. However, not everyone sees this as a bad thing. Corporations and small businesses are traditionally the primary sources of job creation in the United States, and the ones who make the hiring decisions are usually high-income earners. Proponents of the tax cuts argue that the extra income allows businesses the flexibility to expand operations and invest in infrastructures, all of which will lead to more jobs and robust economic growth.
Is there any evidence that the Bush tax cuts have had a positive impact on the U.S. economy? In the 3-year span following the passage of the second round of tax cuts in 2003, the United States did experience decent economic growth (between 3-4%) and enjoyed unemployment rates in the 4-5% range. Additionally, business investment and the stock market were also quite strong during the three years. This was in spite of the fact that there were two wars, lingering effects from the Dot-com crash, and the aftermath of 9/11 terrorist attacks.
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The biggest argument against extending the Bush tax cuts is their negative impact on the federal budget. The cost of extending the tax cuts is likely to be in the trillions. With the budget deficit already at an all-time high, the steep expense is highly undesirable. Proponents of the tax cuts will quickly point out that the enormous cost could be offset by increased tax revenue (fueled by stronger economic growth). The counter point is the fact that the budget was deeply in the red during the Bush years, though defense spending and tax cuts were equally to blame.
Will Bush tax cuts be extended? While the merit of the Bush tax cuts is pretty much up for debate, everyone agrees that they do give businesses the incentives to invest and to possibly hire more workers. With the U.S. economy and employment situation as underwhelming as they are, removing the few remaining incentives for businesses to invest and hire people is likely to have a negative effect on the economy in the short term. In the long run, however, eliminating the tax cuts will help ease the federal budget deficit and national debt.
With the Democrats struggling to hold on to their majority in congress and job creation being the top priority, a decision on whether or not to extend the Bush tax cuts before the midterm election is unlikely. President Obama and his party’s leadership are expected to postpone the decision until after the elections. One probable exception would be if the economy turns for the better before November or if the Democratic Party, in desperation, terminates the tax cuts to energize its core voters. As of now, the former scenario is more credible.