How would you like to do nothing and receive $2.8 trillion? That is what Congress is on course to do on December 31st. On that date the tax cuts enacted under President Bush expire, and federal tax rates will immediately revert to the level they were at ten years ago, taking us back to an era of higher taxes and lower take-home pay.
Washingtonians will be hit hard. According to the Tax Foundation, the average middle income-family will see its take-home income fall by $1,574 next year alone.
People have conflicting opinions about President Bush and his eight-year presidency, but one thing is certain, he was serious about reducing the financial burden the federal government places on its citizens. The landmark tax relief bills he signed in 2001 and 2003 are among the largest tax cuts in U.S. history. These bills formed the centerpiece of Bush’s domestic policy, and together they freed more than a trillion dollars for private-sector business growth and job creation.
The tax cuts were also good social policy. They encouraged entrepreneurship and financial independence by rewarding work, savings and investment. They promoted social justice and fairness. Letting people keep more of what they earn reduces the reach of government power, and allows citizens to care for their families, give to charity, volunteer more and otherwise contribute to our nation’s civic life.
Those wide-ranging social and economic benefits are now at risk. The expiration of the Bush tax cuts would increase federal taxes across the board, with tax rates for low-income families rising the most. While the top rate would increase by 13%, from 35% to 39.6%, low-income earners would see a rate hike of 50%, as the lowest rate increases from 10% to 15%.
Families with children would see the child tax credit cut in half, from $1,000 down to $500 a year. This policy change would function as a tax on kids, with larger families being hit hardest. The household budget of a couple with four children would be cut by $2,000 in 2011. Higher taxes on children would discourage adoption, meaning fewer waiting children would be placed with a forever family.
At a time when people are trying to reduce personal debt, federal taxes on saving and investment would soar. The tax rate on capital gains would increase by 33%, rising from a 15% tax rate to 20%. The rate on qualified dividends would rise even more, jumping from 15% to as high as 39.6%. The marriage penalty would return, so married income earners would again pay more than if they filed as singles.
Washington state’s economy, with its reliance on world trade, aerospace, high-tech software and cutting edge medical research, depends heavily on access to a steady supply of venture capital. Every additional dollar sent to the federal treasury means one less dollar available in our state to expand a business or create a job.
Higher taxes on investment would particularly hit the elderly living on fixed incomes. Not only would the government take more of the dividend payments seniors receive, there would be fewer dividends paid out overall. A study by the independent CATO Institute found that as taxes on dividends rise, companies are less likely to pay dividends in the first place. This is harsh news for seniors relying on a lifetime of careful investing to make them secure in their old age.
Investment earnings are no longer limited to the retired and the wealthy. Today millions of working Americans participate in the stock market through 401ks, IRAs and employer pension plans. If the federal levy on investments returns to pre-Bush levels, Barclay’s Capital predicts stock prices would drop 8%, meaning thousands of dollars in lost value for households in Washington and across the country.
For Members of Congress campaigning in a tough election year, letting the Bush tax cuts expire seems like the ideal political strategy. With no roll call vote, no floor debate, and no annoying inquiries from local reporters, they need only sit back and wait for the money to roll in. When the higher taxes hit in January, however, their constituents may feel differently.
Letting the Bush cuts expire would turn back the clock, imposing one of the largest tax increases ever, just as Washingtonians and all Americans are struggling to recover from the worst economy in decades.