At a news conference yesterday, the Democratic Senate leadership announced the bad news: no tax cut extensions for anyone will happen before the mid-term elections.
The lack of movement is occurring despite the support by President Obama and 40 House Democrats who want to move forward on extending tax cuts for the middle income earners. The Bush tax cuts are not the only important tax issue that needs to be resolved before December 31st with taxes on estates, capital gains, dividends, important corporate tax credits and relief from the Alternative Minimum Tax all up for renewal according to WSJ.
Not surprising, both sides blame each other for the intransigence.
The Democratic leadership states that the Republicans are holding up the process by insisting that all taxpayers receive the extensions. The Republicans counter that the lack of movement on a bill is due to fights within the Democratic membership. The fact that currently there is no bill even offered by House or Senate Democratic tax writers is troubling.
For the last 14 years, the United States has had a policy of lowering the tax burden on individuals and capital.
Under the most likely scenario, the Bush tax cuts will be extended for only those below $250,000.
The reason put forward is to make those that can afford to pay the taxes do so with the majority of Americans benefiting.
This sounds reasonable until you study the effects on allowing taxes to rise on high earners, capital gains and dividends.
Using the same economic model used by leading US governmental agencies and Fortune 500 companies, the Heritage Center for Data Analysis produced a reportthat shows the effects of a tax hike on those earning above $250k. Even if you don't agree or like Heritage, I recommend you read it due to the fact that this is same model that President Obama is likely using to understand the macro effects of his tax proposals.
The results show what is at stake:
- Slower economic growth: Inflation-adjusted gross domestic product (GDP) would fall by a total of $1.1 trillion between FY 2011 and FY 2020. GDP in 2018 would fall by $145 billion alone. The growth rate of the economy would be slower for the entire 10-year period.
- Fewer jobs: Slower economic growth would result in less job creation. Employment would fall by an average of 693,000 per year over this period with 238,000 fewer jobs in the critical economic recovery year of 2011; in one year alone, 2016, job losses top 876,000.
- More unemployed Americans: Slower growth in employment translates to a higher unemployment rate, which would rise more each year during the 10-year period than it would without the Obama tax hikes.
This is the dirty secret that no one wants to discuss, but most Americans intuitively understand: raising taxes on one group of earners is going to impact all earners. For the markets, the higher tax will decrease the amount of capital available for factories, capex and investment. Again, this is just for the tax hikes on earners over $250k.
Both Democrats and Republicans would be wise to understand these effects as they stall on passing critical tax legislation this year.
Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and
Andrew B. BuschDirector,