Money Morning Mailbag: Ending Bush Tax Cuts Not a Cure-All for U.S. Financial Woes

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The question of whether or not to extend the Bush tax cuts will be a pivotal issue as Washington prepares for this year's midterm election.

The Congressional Budget Office yesterday (Thursday) reported that extending the tax cuts would result in only short-lived economic benefits.

"[It would provide] a considerable boost to economic activity in 2011 and beyond for a few years," CBO Director Douglas Elmendorf told CNN. "Over time, [however,] the negative consequences of very high federal borrowing build up."

The CBO reported that if the cuts for most U.S. taxpayers were made permanent - as proposed by U.S. President Barack Obama - the nation's accrued debt (not including money owed to Social Security and other government trust funds) could climb to 100% of gross domestic product by 2020, up from 62% this year. 

President Obama and Democrats want to extend the cuts for individuals earning less than $200,000 and families earning below $250,000, while letting the rest of the cuts expire. Republicans want all of the tax cuts extended.

U.S. Treasury Secretary Timothy F. Geithner is supporting the Obama administration's plan of letting those cuts expire, saying that would signal to the rest of the world that the United States is making strides to cut its long-term deficit.

According to a poll by Pew Research Center last month, 31% of Americans said the tax cuts should expire, 30% support the tax cuts remaining, and 27% want tax cuts for the wealthiest households repealed but the rest of the cuts maintained.

While Congress readies for debate on the cuts, our readers sent the following thoughts and concerns to the Money Morning Mailbag:

I believe taxes are too big, but then again so is our government that needs to cancel many programs. Less government and fewer taxes go hand and hand.


MM: While the current debate singles out the tax cuts, economists are encouraging policymakers to remain focused on spending cuts as well. Some deficit experts have praised the British deficit reduction plan, which consists of 75% spending cuts and only 25% in tax cuts.

Extending the tax cuts for everyone for another 10 years would withhold about $3 trillion from the government; just eliminating the high-tier cuts would total $2.2 trillion. If all tax the cuts are extended, that money will have to be scraped from somewhere - something lawmakers have yet to determine.

Every one should pay some tax so they will know they are supporting our government, but $200,000 is too high. Make it $100,000 for individuals and $150,000 for families. And raise the inheritance tax; no one inheriting over $500,000 should be exempt.

- Clarence S.

MM: So far there has not been talk of lowering the annual taxable income limits of $200,000 for individuals and $250,000 for families. About 98% of U.S. households fall into those categories, so if the Democrats got their way only 2% of the taxed population would see a difference in their taxes next year.

Under current rates, households with more than $1 million in taxable income would get a $100,000 tax cut, but that could fall to $6,300 if their cuts expire. Those with $500,000 to $1 million in taxable income currently see about $17,500 in cuts but that will fall to $6,700 if allowed to expire.

I reluctantly agree with the Obama administration on extending Bush tax cuts, but only to those within their income limits. This will hurt small business, though less than most imagine, and it will not resolve our budgetary problems.

We cannot make progress against our deficit so long as our representatives in government profit so mightily by spending with constituents and lobbyists to preserve their campaign contributions. How few Americans do you think are aware of the following: When a rep or senator retires or is voted out of office (rare), they get to keep- tax-free- all the monies remaining in their campaign fund?

Bottom line: If you want to "buy" one of them, forget a criminal bribe, just contribute to their campaign fund. Until, and if (unlikely), this ends, we're toast.


MM:According to a study by the Center for Responsive Politics, the 25 senators and representatives who have announced retirement after this term have a combined total of $31 million in leftover campaign funds. The Federal Election Commission (FEC) prohibits leftover funds from going to personal use once an elected official leaves office, but the funds can be used for almost any other lawful purpose.

Most send the leftover funds to national party committees or party campaign committees.

There is a loophole that the FEC has tried to remedy. Leadership political action committees (PACs) do not have a personal use ban once the official leaves office.

According to Campaign Legal Center attorney Paul Ryan, the PACs "have become just big slush funds. A very small amount of the money in leadership PACs is passed on to other candidates. They have been abused in this manner since the mid to late 1990s."

The PACs of the 25 Congress retirees total about $850,000, according to the Center's study.

Last I heard, Warren Buffet said he didn't need a Bush tax cut. Why extend then for the uber-rich?


MM: The households that might not escape a tax-cut extension only constitute about 2% - 3% of the taxable population. Those supporting continued cuts for everyone argue that the economy is still too fragile to expect taxpayers to pony up more than what they are already budgeting. Republicans also fear that the effect of repealing tax cuts on small businesses would stunt their chances of continued growth.

"We are eager to oblige our friends on the other side of the aisle who want to have this debate," said Sen. Orrin Hatch, R-UT. "This is about stopping a job-killing tax hike on small businesses during tough economic times."

Meanwhile, Warren Buffett is already parting with his billions. He joined with Bill Gates to spearhead "The Giving Pledge." The duo issued a $600 billion challenge to their fellow "uber-rich" in Fortune magazine in June to contribute sizeable amounts of money to charity, and it has received a number of pledge letters already.

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