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Five myths about the Bush tax cuts

By William G. Gale
Sunday, August 1, 2010; B03

The tax cuts enacted in 2001 and 2003, known as the Bush tax cuts, are set to expire Dec.
31, and the fight over what to do is increasingly heated. Should the tax cuts expire, as
some Democrats have said? Should they be extended, as most Republicans maintain? Or
does the answer lie somewhere in between, as the Obama administration, led by
Treasury Secretary Timothy Geithner, has argued in recent weeks?
The cuts lowered tax rates across the board on income, dividends and capital gains;
eventually eliminated the estate tax; further lowered burdens on married couples,
parents and the working poor; and increased tax credits for education and retirement
savings. Obama's proposal would extend most of these reductions, allowing only those
for individuals making more than $200,000 and families making more than $250,000 to
Complicating the debate is a gloomy economic and fiscal outlook, one that is decidedly
different from the rosy scenario that prevailed at the beginning of the last decade. That
outlook has given rise to a number of stubborn myths about what extending the Bush tax
cuts would -- or wouldn't -- do.
1. Extending the tax cuts would be a good way to stimulate the economy.
As a stimulus measure, a one- or two-year extension has one thing going for it -- it would
be a big intervention and would provide at least some boost to the economy. But a good
stimulus policy can't just be big; it should also offer a lot of bang for the buck. That is,
each dollar of government spending or tax cuts should have the largest possible effect on
the economy. According to the Congressional Budget Office and other authorities,
extending all of the Bush tax cuts would have a small bang for the buck, the equivalent of
a 10- to 40-cent increase in GDP for every dollar spent.
Why? As the CBO notes, most Bush tax cut dollars go to higher-income households, and
these top earners don't spend as much of their income as lower earners. In fact, of 11
potential stimulus policies the CBO recently examined, an extension of all of the Bush
tax cuts ties for lowest bang for the buck. (The CBO did not examine the high-income tax
cuts separately, but the logic it used suggests that extending those cuts alone would have
even less value.) The government could more effectively stimulate the economy by
letting the high-income tax cuts expire and using the money for aid to the states,
extensions of unemployment insurance benefits and tax credits favoring job creation.
Dollar for dollar, each of these measures would have about three times the impact on
GDP as continuing the Bush tax cuts.
2. Allowing the high-income tax cuts to expire would hurt small businesses.
One of the most common objections to letting the cuts expire for those in the highest tax
brackets is that it would hurt small businesses. As Sen. Orrin Hatch (R-Utah) recently put
it, allowing the cuts to lapse would amount to "a job-killing tax hike on small business
during tough economic times."
This claim is misleading. If, as proposed, the Bush tax cuts are allowed to expire for the
highest earners, the vast majority of small businesses will be unaffected. Less than 2
percent of tax returns reporting small-business income are filed by taxpayers in the top
two income brackets -- individuals earning more than about $170,000 a year and families
earning more than about $210,000 a year.
And just as most small businesses aren't owned by people in the top income brackets,
most people in the top income brackets don't rely mainly on small-business income:
According to the Tax Policy Center, such proceeds make up a majority of income for
about 40 percent of households in the top income bracket and a third of households in the
second-highest bracket. If the objective is to help small businesses, continuing the Bush
tax cuts on high-income taxpayers isn't the way to go -- it would miss more than 98
percent of small-business owners and would primarily help people who don't make most
of their money off those businesses.
3. Making the tax cuts permanent will lead to long-term growth.
A main selling point for the cuts was that, by offering lower marginal tax rates on wages,
dividends and capital gains, they would encourage investment and therefore boost
economic growth. But when it comes to fostering growth, this isn't the whole story. The
tax cuts also raised government debt -- and higher government debt leads to higher
interest rates. If estimates of this relationship -- by former Bush Council of Economic
Advisers chair Glenn Hubbard and Federal Reserve economist Eric Engen, and
byoutgoing Office of Management and Budget Director Peter Orszag and myself -- are
accurate, then the tax cuts have raised the cost of making new investments. As the
economy recovers and private borrowing rises, the upward pressure on interest rates is
likely to grow even stronger.
I have used standard growth and investment formulas to calculate that the overall effect
of the Bush tax cuts on economic growth has therefore been negative -- and it will
continue to be negative if the cuts are extended.
4. The Bush tax cuts are the main cause of the budget deficit.
Although the cuts were large and drove revenue down sharply, they are not the main
cause of the sizable deficit that exists today. In 2007, well after the tax cuts took effect,
the budget deficit stood at 1.2 percent of GDP. By 2009, it had increased to 9.9 percent of
the economy. The Bush tax cuts didn't change between 2007 and 2009, so clearly
something else is to blame.
The main culprit was the recession -- and the responses it inspired. As the economy
shrank, tax revenue plummeted. The cost of the bank bailouts and stimulus packages
further added to the deficit. In fact, an analysis by the Center on Budget and Policy
Priorities indicates that the Bush tax cuts account for only about 25 percent of the deficit
this year.
5. Continuing the tax cuts won't doom the long-term fiscal picture; entitlements are
the real problem.
One theory holds that the country's long-term budget shortfall is "just" an entitlements
problem, the result of rising costs associated with growing Social Security rolls and
increased health-care spending (via Medicare and Medicaid). Republicans like this idea
because it plays down tax increases as a potential solution. Democrats like it because it
makes the recent health-care package seem like even more of a triumph.
But it just isn't true. The deficits we face over the next decade reflect a fundamental
imbalance between spending and revenue, one that goes beyond entitlements. Based on
projections by the CBO, Alan Auerbach of the University of California at Berkeley and
myself, among others, even if the economy returns to full employment by 2014 and stays
there for the rest of the decade, the continuation of current fiscal policies, including the
Bush tax cuts, would lead to a national debt in the range of 90 percent of GDP by 2020.
That's already the highest rate since just after World War II -- and Medicare, Medicaid
and Social Security aren't expected to hit their steepest spending increases until after
According to these same projections, the yearly deficit would rise to 6 to 7 percent of
GDP by 2020. The Bush tax cuts would account for a significant chunk of this,
considering that in each year they are in effect, the revenue lost because of them amounts
to nearly 2 percent of GDP.
Compounding the problem: By increasing the government's debt, the tax cuts have
already led to higher interest payments on that debt. So even if all of the cuts expire on
Dec. 31, we will still be paying for them for years to come.
William G. Gale is a senior fellow at the Brookings Institution and co-director of the
Urban-Brookings Tax Policy Center.
Want to challenge everything you think you know? Visit the "Five Myths" archive.

Published on Friday, June 18, 2004 by

Scrooge & Marley, Inc. -- The True Conservative

by Thom Hartmann
"That liberty [is pure] which is to go to all, and not to the few or the rich alone."
--Thomas Jefferson to Horatio Gates, 1798.

There is nothing "normal" about a nation having a middle class, even though it is vital to the survival of

As twenty-three years of conservative economic policies have now shown millions of un- and
underemployed Americans, what's "normal" in a "free and unfettered" economy is the rapid evolution of a
small but fabulously wealthy ownership class, and a large but poor working class. In the entire history of
civilization, outside of a small mercantilist class and the very few skilled tradesmen who'd managed to
organize in guilds (the earliest unions) like the ancient Masons, the middle class was an aberration.

If a nation wants a middle class, it must define it, desire it, and work to both create and keep it.

This is because a middle class is the creation of government participation (conservatives call it
"interference") in the marketplace, by determining the rules of the game of business and of taxation, and
by providing free public education to all. And it wasn't until 1776, when Thomas Jefferson replaced John
Locke's right to "life, liberty and property" with "life liberty, and the pursuit of happiness" that the idea of a
large class of working people having the ability to "pursue happiness" - the middle class - was even
seriously considered as a cornerstone obligation of government.

(That was also the first time in history that "happiness" had ever appeared in any nation's formative
documents. As Jefferson wrote in 1817 to Dr. John Manners, "The evidence of this natural right, like that
of our right to life, liberty, the use of our faculties, the pursuit of happiness is not left to the feeble and
sophistical investigations of reason, but is impressed on the sense of every man.")

Thomas Jefferson laid out in an 1816 letter to Samuel Kerchival what today would be a blistering attack
on the conservative/corporate war on labor and Bush's union-busting planned privatization of over
700,000 government positions.

"Those seeking profits," Jefferson wrote, "were they given total freedom, would not be the ones to trust to
keep government pure and our rights secure. Indeed, it has always been those seeking wealth who were
the source of corruption in government. No other depositories of power have ever yet been found, which
did not end in converting to their own profit the earnings of those committed to their charge."

He added: "I am not among those who fear the people. They, and not the rich, are our dependence for
continued freedom. ... We must make our election between economy and liberty, or profusion and
servitude. ... [Otherwise], as the people of England are, our people, like them, must come to labor sixteen
hours in the twenty-four, ... and the sixteenth being insufficient to afford us bread, we must live, as they
now do, on oatmeal and potatoes; have no time to think, no means of calling the mismanagers to
account; but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our
fellow sufferers."

A totally "free" market where corporations reign supreme, just like the oppressive governments of old,
Jefferson said could transform America "...until the bulk of the society is reduced to be mere automatons
of misery, to have no sensibilities left but for sinning and suffering. Then begins, indeed, the bellum
omnium in omnia, which some philosophers observing to be so general in this world, have mistaken it for
the natural, instead of the abusive state of man."

As Jefferson realized, with no government "interference" by setting the rules of the game of business and
fair taxation, there will be no middle class.

Although this may come as a sudden realization to many, we've really known it all our lives.

For example, every year, millions of Americans revisit Charles Dickens "A Christmas Carol" about
Ebenezer Scrooge and Bob (and Tiny Tim) Cratchit. Yet somehow Americans fail to realize the subtext of
the story (and so many of Dickens' other works). That subtext is that the middle class is not a normal
thing: exploited workers are the norm. In fact, in the six-thousand-year history of the "civilized" world, a
middle class emerging in any nation has been such a rarity as to be historically invisible.

As Dickens pointed out, Cratchit lived the typical life of that day's English working poor. He couldn't afford
medical care for Tim, dooming his son to death or a lifetime of deformity. He had no idea where his
Christmas dinner may come from, let along how to get gifts for his children, and always lived on the edge
of the terror of unemployment and homelessness. Although he had a full-time job at Scrooge & Marley,
Inc., he was so desperately anxious to keep his job that he worked weekends and evenings and put up
with years of daily abuse from his employer.

This demonstrates the true liberal/conservative divide. Conservatives believe what business does is
business's business, and government should keep its nose out of it, even when it leads to centuries of
Tiny Tims and terrified-of-job-loss employees. As the Wall Street Journal noted in 1997, Alan Greenspan
sees one of his main jobs as being to maintain a high enough level of "worker insecurity" that employees
won't demand pay raises and benefits increases, thus provoking "wage inflation." ("CEO inflation" is fine
with the cons.)

Liberals, on the other hand, subscribe to the notions of the founder of today's Democratic Party --
Thomas Jefferson -- that if the government doesn't actively participate in regulating how the game of
business is played, the middle class (what in Jefferson's day were the "yeomanry") would vanish.

The United States has had two great periods of what we today call a middle class. The first was from the
1700s to the mid-1800s, and was fueled by virtually free land for settlers. People owned the means of
their production (their farms), could sell their surplus, and had time to be among (as deTocqueville
pointed out) the most well-educated, politically active "non-aristocrats" in the world.

As big business grew in the 1800s after the Civil War, the farm-based middle class collapsed, in large
part because the early progenitors of companies like today's Cargill or ADM came to control the sale and
distribution of farm produce. Middle class farmers rose up, created the Grange movement as part of their
own way of competing with the big ag companies, and -- seeing that their "representative government"
was being taken over by the largest corporate interests -- launched the Populist and Progressive

Step one was to limit the size of corporations to limit their power -- thus the Sherman Anti-Trust Act of
1881 (still law, but unenforced for all practical purposes since Reagan.)

Step two was to take Teddy Roosevelt's advice that, "We must drive the special interests out of politics.
The citizens of the United States must effectively control the mighty commercial forces which they have
themselves called into being. There can be no effective control of corporations while their political activity
remains." Progressives pushed hard, and in 1907 a law was passed (still on the books) making it illegal
for corporations to give money to politicians. It needs to be expanded.

The last parts of the progressive agenda included a direct election of the U.S. Senate (Senators had been
pointed by political machines in the states) so the progressives may get more democracy and
representation, and the hope that when women voted (besides it being the morally right thing) they may
help break up the old boy's club of big business. (These goals were achieved in 1913 and 1920.) And,
even in the face of corporate violence that often escalated to murder, Americans struggled to bring
together the budding union movement.

But the middle class of the farmers never really again recovered their middle class status in America
(although there are dying pockets of it still about, supported by Willie Nelson, Farm Aid, and other
groups), and the Gilded age saw a very Dickens-like America -- a small group of very wealthy business
and land owners and a very large class of desperately poor workers.

It took the leadership of FDR for government to again take a hand in creating a middle class, this time via
industrialized labor instead of land (times change, and we'd taken about all the land we could from the
Native Americans).

The Wagner Act of 1935 guaranteed Americans the right to form a union and bargain collectively with
their corporate employers. Combined with the later G.I. Bill that sent millions of young men and women to
college and technical schools in the late 1940s and early 1950s, not only did America recover its
prosperity, but a second great middle class began forming. A middle class that wouldn't have existed
without "government interference" in the game of big business.

(Some say WWII was the stimulus out of the depression, and it was an economic stimulus from which
many, like the Bush family benefited [even to the extent of helping out Hitler], but the real events of the
1930s and 1940s that set the stage for a second American Middle Class were primarily the Wagner Act,
the G.I. Bill, and tax changes ranging from raising the top rate on the most rich to 90 percent to offering
an emerging middle class home interest tax deductions. Spending money on weapons that serve no
useful purpose after they're used doesn't stimulate an economy the way building roads, bridges, houses,
or domestic consumer industries, which "keep on giving," does.)

And to stimulate that domestic economy, we instituted progressive taxation, which gave workers more to
spend, thus stimulating demand for more goods and services.

Progressive taxation has a long history: As Jefferson said in a 1785 letter to James Madison, "Another
means of silently lessening the inequality of property is to exempt all from taxation below a certain point,
and to tax the higher portions of property in geometrical progression as they rise."

But the conservatives -- who since the days when John Adams called working people "the rabble" and
Alexander Hamilton suggested they should play no (or only a token) role in government -- fought back. A
true middle class represented a threat to the aristocrats and pseudo-aristocrats of America's
conservatives. They may have to give up some of their power, and some of the higher end of their wealth
may even be "redistributed" - horror of horrors - for schools, parks, libraries, and other things that support
a healthy middle-class society but are not needed by the rich who live in a parallel, but separate, world
among us.

At the height of early participation in the newly empowered union movement (at one point 35 percent of
American workers were union members), in 1947, over Truman's veto, congress passed the Taft-Hartley
Law that significantly weakened union protections defined (and working well) under the 1935 Wagner Act.
Taft-Hartley was (and still is) a powerful weapon for employers over employees (banning sympathy
strikes, etc.), and was used, although most aggressively in the southern states (who declared themselves
"right to work" states under another provision of Taft-Hartley) until Reagan declared a national war on
unionization with his attack on PATCO in 1981.

The cons had first launched their attack on labor in 1947, and Reagan brought it to full fruition: education
was next.

Today, although there are still some educational benefits to GI's (Jessica Lynch joined the army to get
financial aid to go to college to become an elementary school teacher, for example), they're minimal and
hard to both accumulate, track, and take advantage of (and must be paid for in most cases). Although
Jefferson started the University of Virginia with the notion that part of building a middle class (necessary
to a democracy, he said) would require people with some education, and advocated a national program
of free education up to and including university levels, the last state to fall from that ideal was when
Governor Ronald Reagan ended free enrollment in the University of California system.

Jefferson said, in an 1824 letter: "This degree of [free] education would ... give us a body of yeomanry,
too, of substantial information, well prepared to become a firm and steady support to the government."

The attack on higher education was being won (and continues with cuts in college grant programs), and
the cons moved to attack the third requirement for a society to produce a middle class: progressive
taxation. This, of course, infuriates the elite cons who seem to truly believe that a CEO actually works 500
times harder than his employees (or is 500 times smarter).

But history shows that the third pillar of creating a middle class requires a modest control of how wealth is
distributed. The richest, who benefit the most from our society, pay proportionately more, so the middle
class can have home interest deductions, child tax credits, free public education, and health care.
Progressive taxation has helped create every middle class in the First World, and without it the middle
class will vanish (to Steve Forbes delight, apparently).

As Thomas Jefferson wrote to James Madison in 1784, "Taxes should be proportioned to what may be
annually spared by the individual." And, as earlier noted, as wealth rises, so should taxes --

But as president, Reagan cut the top tax rate for billionaires from 70 percent to 28 percent, while
effectively raising taxes on working people via the payroll tax and using inflation against a non-indexed
tax system. It was another hit to the already-beginning-to-shrink middle class, to be followed by more "tax
cut" bludgeons during the first three years of the W. Bush administration.

Nonetheless, a never-ending parade of conservative economists and commentators march through our
living rooms daily via radio and TV, assuring us that it is good for American workers to go along with the
Wal-Martization of America, accept lower pay and few benefits, and fear for their health, so multinational
corporations can "level the playing field" for labor.

They say it will create winners in the system, and they are right. The winners are the multinational
corporations, and the losers are the rest of us. No matter, say the TV commentators -- nearly all
millionaires themselves. "Free trade" sounds sexy; "protectionism" sounds downright selfish. And it's all
too complicated to explain in 20 seconds, even quoting Jefferson.

But, unless we repeal Taft-Hartley; start enforcing the Sherman act, provide free education for Americans
(and not just Iraqis); abandon WTO/GATT and NAFTA; restore progressive taxation (including on
dividend income); force corporations to pay their fair share; and go back to selective tariffs to protect
domestic industries and stop offshoring to explicitly bring home the ability for us to make our own clothes,
furniture, autos, and electronics, the conservatives will have won and the middle class -- and, thus,
democracy -- will lose.

As Jefferson warned in an 1826 letter to Will B. Giles, even then some conservatives "now look to a
single and splendid government of an aristocracy, founded on banking institutions, and moneyed
incorporations under the guise and cloak of their favored branches of manufactures, commerce and
navigation, riding and ruling over the plundered ploughman and beggared yeomanry. This will be to them
a next best blessing to the monarchy of their first aim, and perhaps the surest steppingstone to it."

Jefferson's vision rose to fruition in the Gilded age, was fought back by FDR, and again rose its
antidemocratic head under Reagan, the first Bush, GATT/NAFTA Clinton, and Dubya.

If conservative economics are allowed to continue, and we fully revert to the way life was lived by the
average person in America in 1890 or Dickens' England (over 40 million in America already have, by the
way, many in the past 3 years), there will be no more middle class, just a few more rich CEOs and
Bushies, and a lot more terrified workers living in slavery to debt and terrified of unemployment or a
serious health crisis.

It'll be a marvelous thing for the profits of the multinationals (including those who supply our "news"), but
the end of a way of life in America, and possibly around the world, since so many nations imitate our lead.
And only you and I - the ploughman and yeomanry - can stop them and restore an America where it's
possible to raise a family on one income and still have enough for housing, transportation, food,
education, vacations, health care, and a decent retirement.

The middle class is not a "normal" thing: it's just the core that holds together democracy and an informed,
healthy, and active citizenry.

To bring it back from its steady decline since the Reagan era is going to take a lot of active work
spreading the word (call talk radio, blog, forward this article and similar ones, write a letter to the editor to
your local paper), and participation in or contact with elected officials at all levels (writing elected officials,
joining and volunteering to help your favorite local political party or activist organization, showing up for
rallies, etc.). We must get out the vote and remove the whole con bunch from the White House and
Congress, repeal Taft-Hartley, get corporate money and lobbyists out of our governmental processes,
restore progressive taxation, rebuild our schools, return to the tariff system that protected American
industries (and jobs and communities) from 1786 until 1996, strengthen Social Security, and turn
Medicare into a universal single-payer health system (among other things).

Are you willing to join? Or would you prefer to re-read "A Christmas Carol" to your children, so they can
understand the future America that conservatives have in mind for them?

Thom Hartmann (thom at is a Project Censored Award-winning best-selling author

and host of a nationally syndicated daily progressive talk show that runs in 57 markets from coast-to-
coast. His most recent books are "Unequal Protection: The Rise of Corporate
Dominance and the Theft of Human Rights," "The Last Hours of Ancient Sunlight," "We The People: A
Call To Take Back America," and "What Would Jefferson Do?: A Return To Democracy."