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Debate: Should The Bush Tax Cuts Be Extended?

One of the most heavily debated topics in Congress right now is whether or not to extend the Bush tax cuts. The Bush tax cuts were a lowering of income and capital gains taxes for all Americans. These tax cuts contained a sunset provision which would allow them to expire at the end of this year. Both parties agree that 98% of Americans should continue receiving tax cuts. Tax cuts will be renewed for individuals making under $200,000 a year and couples making under $250,000. The debate is over extending tax cuts for the wealthiest 2% of Americans and large corporations. When you read the headlines, it makes sense to oppose tax cuts for the people who can afford taxes and will never notice it, but it’s a little more complicated than what the headlines depict. Let’s take a look at both sides of the argument for and against tax cuts and then feel free to chime in with your thoughts at the end:

The Pros of Tax Cuts

The argument for tax cuts is that they place more money in the pockets of consumers and companies. Individuals will then turn around and spend this money. The additional tax savings would be used to purchase American goods and services, thus spurring economic growth. Corporations and businesses would then have more money to invest which would lead to greater employment and investments. The underlying belief is that every dollar saved via tax cuts results in one dollar (or more) of economic activity.

One argument is that the government would actually take in more money from tax cuts to the “rich.” Higher income earners save and invest more money than any other income class. One study shows that individuals that earn over $200,000 per year account for nearly 80% of all capital gains, meaning they are investing in the economy (and not just stashing away their money).

The government would also increase their tax revenue since tax cuts incentivize business owners to reinvest in their businesses either through capital expenditures or adding new employees. Thus, the government will gain tax revenue due to new employee hirings (more people to pay income tax) and increased net income (for businesses). The belief is that an increase in long term-tax revenues will pay for the tax cuts.

The Cons of Tax Cuts

The case against tax cuts is that they are not stimulative to economic growth at all. Some people believe that high income earners will just save the money from the tax cuts and not invest it in our economy. The argument goes on to state that companies have figured out how to maximize production from their current workforce so there is no incentive to hire any additional employees even with additional money from tax cuts. To push even more for the removal of tax cuts, people argue that high income earners are less affected by marginal tax changes since they spend less of their income (so therefore they can “deal” with higher taxes).

Tax cuts would cause the government’s tax receipts to decline and the federal deficit to balloon even larger. The government does not take in enough money now to fund its current level of spending. Entitlement spending on Social Security, Medicare, and Defense is projected to increase dramatically over the next decade. So, reducing the government’s tax revenue at the current time will only increase the national debt long term. The belief is that tax cuts will take money from the federal government and further enrich wealthy Americans. The key underlying argument for the “Cons” is that tax cuts DO NOT stimulate the economy.

What is your opinion on tax cuts? Should the tax cuts be extended for the wealthiest Americans or allowed to lapse?

(Photo credit: TenSafeFrogs)

Mark Riddix
Mark Riddix is the founder and president of an independent investment advisory firm that provides personalized investing and asset management consulting. Mark has written financial columns for Baltimore and Washington, D.C. area newspapers and is the author of the book, "Your Financial Playbook."

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