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July 26, 2010

Extend the Bush tax cuts for everyone or no one to avoid tax-class warfare

There has been a lot of talk lately about extending the Bush tax cuts, which expire at the end of this year. The Obama administration and many Congressional Democrats have discussed allowing the cuts to expire for families making more than $250,000 a year, but keeping them in place for everyone else.

Raising taxes on families earning $250,000 — each spouse making $125,000 — in expensive cities such as New York, Chicago or Los Angeles seems unfair. Many families living in Manhattan must use private schools, as public schools are overcrowded with desegregation busing and public schools are being downsized with state deficits. These families are not rich and many will be forced to leave their jobs, move and seek new jobs which are hard to find. Not indexing tax rates for cost-of-living by city and region is unfair. The housing allowance for U.S. residents abroad is indexed by city in this manner.

But even worse is singling out and attacking the perceived rich with tax policies, regulations, editorials and political stump speeches. It’s an ugly and dangerous trend in America and it will hurt our country at a time when we need to reinvent ourselves.

President Obama campaigned on uniting our country with shared responsibility and sacrifice for one America: black and white, Democrat and Republican. But current trends embodied by politics in Washington D.C. are dividing us across money lines.

We are at a very dangerous crossroads with discussion turning emotional over tax and other monetary issues, like health care redistribution and now who is entitled to extension of tax cuts and who should be singled out for tax increases. We should be careful not to inflame tax-class warfare, which may lead to further emotional calls of racism in the Tea Party, and a new term I call “richism” by the less fortunate. Attacking wealthy job creators will continue the current capital strike and prevent new job opportunities.

If we turn the wrong way at this juncture, it will unleash more racism, anti-business sentiment, anti-Wall Street emotions, and overall richism — chastising the financially successful. The wrong way is to extend the Bush tax cuts for people making under $250,000 only and to single out the rich for tax increases and more redistribution.

The right way is to unite our country in shared sacrifice and benefit to work out our common problems together; to either extend the Bush tax cuts for everyone or no one.

Will tax hikes rein in growth?
Let’s create a tax commission made up of economists appointed by both political parties (since economists can be pretty political these days too). The Congressional Budget Office (CBO) that scores tax bills should also factor in growth and/or contraction based on behavioral economics. Currently, they leave out such dynamic factors and claim it’s more conservative that way. Hogwash — this method is blind, based on lazy efforts and renders the results almost not usable at all. The CBO is almost always wrong with its scoring and projections.

The key argument is whether hiking tax rates will seriously affect and rein in growth. Supply-side economics on tax policy says that lower tax rates can lead to growth which actually raises tax revenues based on a larger tax base — even though that base pays a lower rate. This is the crux of the current argument over this issue with the Democrats and Republicans. Pundits grab at convenient facts over the past decades to credit or discredit these theories. Heavy lifting is imperative on this far-too-important issue.

If this commission of economists — working with more dynamic CBO scoring — conclude that raising tax rates in 2011 will not unduly damage growth and will raise tax collections (revenues) to reduce our shared deficit, then maybe we should not extend the tax cuts for everyone. Treasury Secretary Geithner and President Obama share this view, but they only want to raise taxes on the rich, not the middle class as that would break the President’s campaign promise — read his lips.

Conversely, if economists and the CBO believe that raising tax rates will materially hurt growth which may lead to a reduction of tax collections, negatively impacting the deficit and job markets, then our government should extend the Bush tax cuts for everyone. Certainly, the wealthy are a major force in consumption, business expansion and job creation.

Leftover “extenders” items
Congress is considering a small-business package to address tax and jobs. Senate Majority Leader Harry Reid (D-Nev.) mentioned this bill would be debated and put up for voting in September.

I’m guessing this bill may include the left over “tax extenders” bill items that were stripped out of the unemployment benefit extension bill, which finally passed last week on its own — paid for with deficit spending.

Now Congress seems interested in bringing back those tax extenders (expensing, credits, AMT patch and more) and tagging them on to the explosive Bush tax cut extension debate, which is shaping up as a key battle-line vote before the midterm elections in November. Favoring the middle class or the upper class is an ideal battle line for the Democrats, since the middle class holds more voting levers.

The tax extenders bill failed because Republicans wouldn’t agree to raising taxes on investment managers and S-Corps to help pay for it. Republican Senators Scott Brown (Mass.), Susan Collins (Maine) and Olympia Snowe (Maine) are willing to break filibusters over deficit spending but to date, not on tax increases. That could change of course.

How will this new small business jobs and tax package be constructed by Democratic leadership? I predict it will bring back all tax extenders, extend the Bush tax cuts for the everyone but the rich and pay for part of it by repealing carried interest on investment managers and repealing the SE tax break in S-Corps.

How will Democratic leadership frame the tax hikes on the rich — as part of “pay go” for this bill? Or will they seek deficit spending as they did on the unemployment benefit extension bill?

I imagine the President will feel it’s improper for the rich to ask for a tax-cut extension (which increases the deficit) if it’s not paid for. Republicans will be forced to filibuster the tax extenders (including the Bush tax cuts for the middle class) because they will demand spending cuts and Democrats won’t agree to that.

Democrats will say small business-heavy tax extensions are needed — Republican language in general — and it must be paid for somehow, so there’s no room for tax cuts on the upper class. They should help pay for it along with investment managers and S-Corp owners too — groups the Democrats will say can afford it.

Republicans will argue as always that spending cuts should be utilized rather than tax increases on job creators.

In my view, growth has already been stimulated enough by the government, so why not just get out of the way now and stop social tax engineering? Let businesses recover fully from that savaging recession on their own. The worst thing to do now is to adopt further tax-class warfare, which will divide our country and lead to counter-productive policies that stunt growth and innovation.

A small-business tax package may sound like a decent idea. But the Republicans are right — many families making $250,000 are small businesses. If you want to encourage their growth, don’t single them out with targeted tax increases, which can lead to a continued capital strike, and insufficient expansion and job creation. These people are already saving up to pay more taxes. It’s not worth the risk to expand and make a few more dollars if most of that money is taxed away anyway. Why work harder and take that added risk?

A country divided...
This brings me back to my biggest point about dividing our country over these tax cuts. Being castigated and singled out for punishment is one of the worst things someone can experience in society. It makes them feel unwanted and unappreciated and it leads to negative thoughts, withdrawal and depression (or continued recession). It’s the underpinnings of racism and richism.

The NAACP recently called some people in the Tea Party racist. Many in the tea party are very upset about uncontrolled government spending, including spending on entitlement programs and redistribution of those benefits — like health care — to less fortunate Americans. Some people took their emotions too far by castigating black Congressmen.

When the benefactors of government social-spending policies attack perceived rich people, it’s richism. Racism and richism feed on each other and to suppress one you should suppress the other too. It was pretty savage during the French Revolution when rich people were carted off for death. Anti-Semitism often is similar to richism too.

I’m not referring to super rich people like Warren Buffett and Bill Gates — they are different. They save hundreds in millions in taxes by deducting charitable donations to their own foundations. They sit on those charitable fortunes for decades and dole out monies, receiving federal and state income tax deductions for these contributions. Normal Americans must make up for their domestic tax breaks, and that’s not fair. They are contributing hundreds of millions/billions to U.S. organizations with foreign activities rather than paying American taxes to help cities like New Orleans. I support their wonderful charitable efforts, but it doesn’t help America’s budget deficit. Why don’t they just pay more taxes too? They shouldn’t get a tax deduction for these payments. They avoid estate taxes with these charitable foundations too. So when they preach about taxes, I take it with a grain of salt.

Compare a successful business to federal governments at this time. In business, the customer is very appreciated and important. The customer brings in revenue to support the business and all of its jobs. During a recession or slow down, managers rarely raise prices on customers, and they try to improve values for customers. They give their best customers the red-carpet treatment, not the red-tape treatment with onerous new regulations. Business managers seek productivity savings and reductions in unnecessary overhead and spending.

It’s the reverse with our federal government. When times are tough, government proposes raising taxes (customer prices) on their best customers (taxpayers), while giving promotional giveaways and running sales for other customers, many of whom are tax “takers,” not payers. Their promotion for rich customers is “two-for-one” — pay for two (the customer plus the less fortunate customer) and you get one (redistribution). Rather than seek productivity with computers like the rest of America, they avoid it by botching those initiatives and they increase headcount and benefits for their co-worker buddies. The federal government needs a constitutional amendment to balance its budget like states do. States are forced to rein in spending now to stay solvent.

What will rich customer taxpayers do with these tax attacks and onerous policies? They won’t shop in that U.S. and state store anymore. They can afford to move abroad and run their business on the Internet.

German news organization Der Spiegel reported today that German companies are giving up their stock-market listings on U.S. exchanges because the red tape of Sarbanes Oxley was onerous and now it’s far worse with Fin Reg. German companies are fleeing U.S. government tax attacks, anti-business policies and lawsuits. They don’t need American listings or major branch offices anymore. And Germany is one of the export powers of the world who wants to export to America.

Look at a city and state like New York. It’s been ravaged with Fin Reg attacks on Wall Street, the prospect of onerous new bank taxes and a weakening real-estate market. There are hundreds of thousands of New Yorkers who make just over $250,000. They are stretched already. Experts say that each rich New Yorker supports seven jobs around the city. These tax hikes can be the stick to break New York City’s back.

Is it patriotic?
Some on the left are raising the patriotic argument — it’s the wealthy’s patriotic duty to pay more, while others enjoy a continuation of tax cuts. I think it’s more patriotic to extend the tax cuts for everyone or no one. Singling out successful Americans for greedy redistribution and punishment is vindictive and ugly.

The President and his public-relations team will pile on the rhetoric now about how the rich should take this opportunity to pay back some of the out-sized benefits they received over the past decade. But many rich aren’t feeling so fortunate. They are being foreclosed on at a faster pace now than the middle class these days. They’re struggling with reduced compensation and benefits, decimated 401ks and falling real-estate prices. Many are stretched pretty slim financially and they can’t afford tax increases. They will save for them at the expense of consumption, business expansion and job creation.

This tax-class warfare will divide and ruin America. Before we attack the perceived rich, why not ask our federal government to follow the same goals for achieving productivity and fairness that businesses and state and local governments are now adopting.

New Jersey Republican Gov. Chris Christie is right about the inappropriate excesses in public unions, which they are fighting to not give up. He asks why should NJ teachers retire much earlier than most Americans and enjoy full goosed up fixed pensions and health care benefits until they die? Why do teachers unions control state politics, have tenure and avoid federal and state efforts for reform? I don’t want to replace rishism with “unionism,” but we need a shared sacrifice.

A united front is necessary
Everyone is contributing some good ideas; we need to find bi-partisan consensus. Democrats are right about fixing health care to help more Americans. Republicans are right about reining in government excess and spending, and forcing them to seek productivity like the rest of America. Rich people and business are right about anti-business policies coming out of Washington D.C.

Bush tax cuts helped all classes during the recession after the Sept. 11, 2001 terrorist attacks in New York City and Washington DC. Our country was more united back then, and Congress and the President passed bi-partisan tax cuts. Democrats wanted tax breaks for their constituents too. We need to be united now too, with either bi-partisan extension or expiration of the Bush tax cuts. Congress built in a trigger for expiration of the Bush tax cuts in 2010 for all taxpayers, since they were not paid for. So why change that wise Congressional action for some, but not all?

Some argue the rich did well during the Clinton years, considering that the expiration of the Bush tax cuts brings back the Clinton tax rates. But the middle class and poorer people did well tax and economic-wise during the Clinton years too.

Tax cuts and the midterm elections
Politicizing the Bush tax-cut extension or expiration issue for the upcoming midterm elections is wrong. It’s too important an issue for America and how we deal with each other to solve our common problems together. Playing the race card for politics is wrong and so is playing the richism card too.

Extending Bush tax cuts for 95 percent of Americans essentially rewards 95 percent of the voters. Isn’t that morally and ethically wrong? It reminds me of pork-barrel politics that got us into this deficit mess in the first place. It’s wrong for corporations and unions to dominate political advertising and for lobbyists to curry too much favor in the halls of Congress. But it’s even worse to buy Democratic votes with a tax cut, while purposely freezing out some big contributing Republicans. Is this tax policy or political science?

Congress may want to punt this political hot potato with a universal extension for one or two years — all they will say the deficit can afford – but I doubt President Obama will agree. He will stand on principal and he won’t want this hot potato to make a mess of the presidential election in 2012.

Could be a bumpy ride in the next few months
The next few months will be intense on these issues. I think both sides won’t agree, the Republicans will filibuster and the tax cuts won’t be extended before the midterms. But each side can gain political votes over this battle line issue. Some Democrats will join Republicans on extending for all since they know it won’t come up for full vote anyway.

This issue will probably be decided in December when the deficit commission reports to Congress. In December, they will throw the kitchen sink into one bill and after lots of horse trading, who knows the outcome. At stake will be income, estate, investment and other types of taxes, spending, the deficit and more. I hope we can be united over it all.