Bush Tax Cuts Argument Heats Up This Summer

The battle to extend or not to extend the Bush tax cuts has drawn comments from both sides on the potential positive or negative effects of the cuts.

While my economic crystal ball might be no better than anyone else’s, it’s likely that the truth lies somewhere between the two arguments.

In remarks to the Center for American Progress on Wednesday, Treasury Secretary Geithner offered the Obama administration’s view.

“The debate we now confront is whether to extend tax cuts for the middle class, which are due to expire a the end of the year; and whether to allow tax cuts for the top 2 percent of Americans, those with annual household incomes of at least $250,000, to expire, as scheduled. This decision is about more than the impact on our future deficits and debt, although that is critically important,” he said. “It’s a decision that will impact economic growth and the faith of Americans in the fairness of our tax policies.”

Geithner said that the best way to provide tax relief in a fiscally responsible way is “by allowing the top 2 percent to go back to levels seen at the end of the 1990s, a time of remarkable growth and economic strength,” since extending the tax cuts for the top 2 percent would require us to borrow over $700 billion dollars more over the next decade, adding significantly to an already unsustainable level of debt.”

In posing his point, he answered some myths he said had surfaced in the past few weeks.
“There are some politicians who argue that tax cuts pay for themselves. This is a long discredited idea. There is absolutely no evidence to support it,” he said.

“A second myth out there is that by allowing the tax cuts for the top 2 percent to expire, we are going to hurt small businesses. This is a political argument masquerading as substance.”
However, smaller manufacturers disagree with his analysis.

Nearly 68 percent of all manufacturers are organized as S corporations or other entities taxed at the individual rate, which means they pay individual tax rates on their business income, according to Dorothy Coleman, vice president of tax and domestic economic policy at the National Association of Manufacturers.

“So, when the administration says it supports letting the 2001 and 2003 tax cuts expire for the top 2 percent in this country, these manufacturers are included,” she observed.

Since 2007, manufacturers organized as S corporations have lost more than 850,000 jobs – 42 percent of the total jobs lost in the goods-producing sector, Coleman observed in a NAM blog. “Increasing taxes would deal a painful blow and create more uncertainty and increase costs for an industry trying to lead our nation in recovery,” she wrote.

“Manufacturers have been hit hard, especially as a capital-intensive business.

Manufacturers’ equipment is expensive, they have more employees and higher payroll costs, so the money flowing through their business tends to be higher. Further, the company’s profit does not equal the manufacturer’s take-home pay as they reinvest in their business with new equipment and new employees. Often it also means building new facilities.”

Coleman cited a recent survey of small and midsized manufacturing companies, in which 86 percent said they were concerned about the expiring tax rates. The survey by RSM McGladrey shows that small to midsized companies are more cautious about economic recovery than larger companies.

“The improvement in business conditions for larger companies is directly related to increased order activity spurred by growing optimism over the economy,” said Tom Murphy, McGladrey’s executive vice president of manufacturing and distribution. “But we’re still seeing lower levels of inventory and spot shortages in the supply chain given that small and midsized companies remain so risk-averse following the recession.”

So whatever transpires in the way of tax rates, here’s hoping the long-term effects will be beneficial for us all.