National debate surrounding taxation recently reignited around the "Bush" tax cuts, due to expire by 2013. Again, America faces the great catch 22 – grappling with the fine line of true success between stimulus and austerity.
President Barack Obama's proposal against this catch 22 is to extend tax cuts for another year for those earning below $250,000 annually, which would significantly increase taxes for those earning a higher income. The plan however has launched the usual partisan uproar against any taxes in an unstable U.S. economy with large unemployment.
Although the issue of extending or cancelling the Bush tax cuts has become a potent issue in the 2012 elections campaign, it is necessary to brush politics aside and focus on the tax's huge implications on federal government and the national economy.
Times have changed since President George W. Bush assumed office in 2001, when he inherited a treasury with a significant surplus. Bush then, believing the surplus was the "people's money," decided to return the surplus to the American people through reduced tax rates from July 2001 to December 2010.
Unforeseen by the Bush administration however was the rise of the "Great Recession," following the implosion of the once buoyant housing market and the collapse of major American financial institutions, which led to today's stubborn unemployment numbers
By 2009, new President Obama landed in an economic quagmire, where the government was forced to step in with stimulus dollars to somehow halt the country's spiral downwards. With the need for federal funds for economic recovery mounting, the Obama administration and Congress understandably faced a difficult decision in December 2010 to extend the Bush tax cuts. While ending the Bush tax cuts could have provided the revenue needed to address the emergencies launched by the recession, the government also needed to continue stimulating the economy by extending the tax cuts, giving consumers spending power.
This inevitably left a strain on the nation's debt. History may depict Barack Obama as the president who presided over these steep federal spending increases. But with the country at the brink of a depression, these desperate circumstances would have warranted similar action from whoever occupied the White House.
Flash forward to 2012, today's government may have changed from emergency mode to rebuilding, but the dilemma remains the same. The government needs additional revenue for major social and economic projects, such as the controversial Affordable Care Act, and to reduce the national deficit. On the other hand, not extending the Bush tax cuts could hurt the economy by reducing critical consumer spending, and possibly creating another recession.
Obama's proposal to extend tax cuts for the middle class, but not for those earning over $250,000, may be a fair compromise, attempting to stimulate middle class spending while collecting more taxes from those with larger resources.
Whoever is elected president in 2012 will face the predicament of creating an economic stimulus that will create jobs. Cutting taxes may be the best way of doing this. But that president's problems will again be compounded by the need to still boost government's spending until the economy improves.
Likely, the Bush tax cuts will be temporary extended to February 1, 2013 – becoming the first item on the agenda for a newly elected Congress. But regardless of who is president, a new, bold, bi-partisan approach will be necessary.
In the opinion of many economists, the Bush tax cuts should be allowed to expire, and be replaced immediately by a new medium-term tax policy that seeks to stimulate the economy, shifts the tax burden away from the lowest income earners and guarantees sufficient taxes are raised to fund critical government services, all while controlling the national deficit. The new administration must focus on designing and implementing an overdue long-term realistic tax policy for the nation.