Congress: Its Time to Use the Tax Laws to Help the Economy, Not Make It WorseNovember 1, 2010
Here’s a question that as of today (October 14, 2010) does not have a clear answer: Will Congress extend the Bush tax cuts that became law in 2001 and 2003 and are scheduled to expire after 2010?
First, a bit of history. When the income-tax rates were cut by Congress at the turn of the century (known as the “Bush tax cuts”), the amount of income-tax revenue actually rose in the years that followed. The same result—tax revenues climbed—followed significant tax cuts during the Reagan administration and during Kennedy’s short term in office.
Whoa! There’s a clear pattern here, proven three times by the facts, as opposed to political posturing. Hey, Congress, do you get the message? Lower income-tax rates produce larger tax revenues. Simple!
Yet here’s the current Congressional position: A majority of Democrat and Republican lawmakers want to keep the Bush tax cuts for families that earn $250,000 or less. A good start.
But look out! Most Democrats would end the tax cuts for families earning more than $250,000. What group of taxpayers do you think earns more than $250,000? Successful owners of closely held businesses. Sorry, but as of now the answer to the question in the first paragraph, ‘Yes’ for families earning $250,000 or less and a sad political ‘No’ for families earning more than $250,000.
Bad news for the successful closely held businesses that we know provide more than 50 percent of the jobs in our country.
Maybe economic logic can s enough Congressional votes to keep all of the Bush tax cuts in place. Let’s take a look at some of the problems that would be helped by keeping income taxes down for all Americans:
- Improve the economy;
- Increase tax revenues;
- Help closely held businesses grow;
- More jobs; and
- With a little amendment to keeping the tax cuts, help alleviate the tragedy of banks not making enough loans to businesses.
One of the advantages of writing a tax column is that I get to talk to business owners all over the country, answering tax questions, solving tax problems, but mostly doing estate planning. No question about it, 2010 for almost every business owner I talk to is better than 2008 and 2009. Many are enjoying record sales and profits. But often taxes—even at the Bush tax-cut rates—stunt the growth of the business. Growing businesses provide jobs (new employees put almost all of their earnings back into the economy), buy more inventory and equipment and make other necessary business expenditures. The ripple effect is positive for other businesses, their employees and, of course, the economy.
But growth requires capital to fund increased inventory, receivables and equipment. Bank loans—the traditional of funding business growth—is usually not available in these economic times.