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DAVID KRUSE

By Staff | Aug 6, 2010

Capitalism is when individuals are treated the same economically. The rich don’t get advantages, but neither is success penalized. George W.’s tax cuts were an exercise in capitalism designed to boost the economy.

George Sr. lost his second term because of an economic recession. That made an indelible impression upon his son, who didn’t trust Alan Greenspan to provide enough economic stimulus to avoid another recession, so cut taxes as his economic stimulus package to avoid the same fate as his father.

It is good fiscal policy to reduce taxes in a recession, but the Bush tax stimulus was never rolled back when the economy boomed. It worked. Unlike his father, George W. won a second term. His tax cuts did boost economic activity. It can be argued that growing the economy is never deficit negative.

Democrats claim that every dollar the Bush tax lowered government revenue was added to the deficit. That is too simple a conclusion. The Bush tax cuts did help spur economic growth so more revenue was subject to taxes providing an offset for some of the reduction in revenue due to the reduced tax rates.

The Wall Street Journal calculated the Bush tax cuts reduced government revenue $1.7 trillion since 2001. Of a projected $13 trillion deficit accumulated, that represents just 14 percent of the swing in projected surplus to deficits projected by the CBO.

New spending was 32 percent responsible, interest on the debt, 12 percent. The rest was technical revisions and other tax cuts, 36 percent and the 2009 stimulus, 6 percent. I think one could argue that a tax holiday would have been much more effective economic stimulus than the Obama administration’s poorly structured stimulus spending.

You sure don’t raise taxes in an economic recession. Not if you are focused on economic recovery and economic growth. Ben Bernanke told Congress that it is premature to withdraw stimulus’, including the Bush tax cuts, as the economic recovery is too fragile.

Common sense says that it’s not the time to raise taxes and the academic advice given is that the Bush tax cuts should be extended in total before they expire at year’s end.

What do you suppose the political response is? The Obama Administration and Nancy Pelosi plan to raise taxes. That’s a mistake. It reminds me a bit of the Smoot-Hawley Tariff Act in 1930 when 1,000 economists told Republicans and Hoover not to enact the tariff, which is raising taxes in a protectionist manner, but politics won out.

Democrats this go around think that letting the Bush tax cut expire for those making over $250,000 per year and not for everybody else makes it okay.

That’s not economic policy, its social policy. Job growth generation is concentrated in those who will get their taxes raised.

Raising taxes will depress job growth, worsening the economy more than it will help the deficit. The economic recovery is fragile. Bernanke described the economic outlook as “unusually uncertain.”

“The attitude reflects a broad range of indicators that have grown increasingly anemic or negative in recent weeks,”?Bernanke said. “Consumer spending is softening, the trade deficit is widening, housing sales are faltering, manufacturing is losing steam.” What’s really disjointed is that the Obama administration wants to enact another stimulus package. That means raise taxes, yet boost government spending. That puts them in charge of our money like they will be wiser in spending it than we are.

Most economists have been discounting the probability of a double-dip recession. If every thing goes really good from here with no new ton of bricks falling on the economy, the prospect to me is that growth will languish at low levels while the debt, excesses and fallout from the previous boom-bust cycle are absorbed and eventually another economic growth cycle will begin after a protracted period of basing.

Raising taxes on any segment of tax payers will make this outcome more likely. That’s not a very exciting prospect, but the reality that we are dealing with. The worse alternative is that the economy is so fragile any number of things could derail the recovery. Some new bearish event can occur, triggering the double dip.

The Bush tax cuts sunset this year. In order to extend them, it requires legislative action. Democrats want to pick and choose who gets tax cuts. They don’t have 60 Democrats in the Senate willing to go along with their social engineering tax discrimination. Proposing raising taxes in a recession is not going to win them the votes next fall that they think it will. It will make them responsible for any future failing of the U.S. economy.

They give lip service to cutting the deficit from the spending side. They can’t tax the wealthy enough to eliminate the deficit and if they try, may only make it bigger by generating a double dip recession.

If Democrats don’t act to change things on Jan. 1, 2011, the top income tax rate rises from 35 percent to 41 percent.

The capital gains rate rises from 15 percent to 20 percent, the top dividend rate rises from 15 percent to 39.6 percent and the estate tax jumps from 0 percent to 55 percent.

This will give the Republicans the political ammunition to label Democrats as tax raisers again for another generation.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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