The Coming Tax War: How Letting the Bush Tax Cuts Expire Could End the Economic Crisis

The Coming Tax War: How Letting the Bush Tax Cuts Expire Could End the Economic Crisis

The Democrats appear to be sitting on a golden ticket when it comes to ending the economic crisis. Furthermore, the solution to this country’s economic woes wouldn’t require them to do a thing, short of allowing the Bush tax cuts to expire (as required by law) and appropriating the money for renewed stimulus and in aiding states to cover their budget deficits. Whether the party has the courage to resist Republican and conservative dogmas framing tax cuts as the solution to the crisis remains to be seen.

The Urban Institute finds that Americans are waiting longer to retire in light of the increasingly dire conditions in the US and in light of the mass firings looming throughout the states and the continued high levels of national unemployment. While only 20 percent of those born between 1933 and 1937 failed to retire by 65 years of age, that number has doubled for those born between 1943 and 1947.(1) Many Americans are predictably worried about whether they will have enough in savings to retire in light of the massive deterioration of 401K accounts following the 2008 economic collapse, when coupled with Republican and Democratic officials’ suggestions that major sacrifices and/or cuts will be needed in the Social Security program.(2)

Two and a half million Americans were worried about losing their unemployment benefits until Congress recently passed an extension, despite Republican efforts to block the bill.(3) State budgets will also likely continue to run deficits, despite the Senate’s recent attempt to extend $26 billion in funds for education.(4) Unemployment remains at near 10 percent, with underemployment coming closer to 20 percent.(5) Economic growth remains rather anemic, as economist Dean Baker warns of the possibility of a “double dip” recession in the near future.(6)

Additional factors may help foster further economic decline, including proposed (and planned) mass layoffs of tens of thousands of state employees across the country, the expiration of the first-time home buyers tax credit, the winding down of stimulus funding (in light of the failure of Democrats to pass a second stimulus) and a decline in consumer spending amid continued public concern about worker instability and unsustainable (and rising) personal credit card debt. Personal savings have reached an all time annual high this month, reflecting these concerns.(7)

Over the last few decades, Americans have been working longer and longer hours and have become more and more productive, while receiving dwindling economic returns.(8) The median family income in the US has stagnated in recent decades, while the number of dual-earner families increased significantly.(9) This pattern actually translates into a decline in family earnings since median household income has stagnated to barely risen, while the number of dual-earner households nearly doubled from the 1960s to the 1990s .(10) At the same time, income inequality between the richest one to five percent and the rest of America has grown dramatically, approaching depression levels.(11) Simply put, America’s corporate class is doing better than ever – especially with the recent return of pre-2008 profitability levels – while the rest of America is being asked to tighten their belts, give up their homes and work in permanently insecure jobs for diminishing pay and benefits.(12)

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Allowing the Bush-era tax cuts to expire will remove a massive boon for America’s rich, which benefitted the most from Republican policies over the last decade. Reinstatement of the Estate Tax, the Alternative Minimum Tax and the return of pre-Bush income tax levels for the richest Americans (among other tax changes) will result in an increase of more than $217 billion in tax revenues for 2010 and 2011. The expirations will then contribute another $1.25 trillion from 2012 through 2015, and an additional $2.2 trillion from 2016 to 2020.(13) The Center for Economic and Policy Research projects that it could take a decade for the US to return to pre-2008 unemployment levels.(14) The unemployment problem, however, could be greatly reduced if even a portion of the more than $3.6 trillion in public revenues that would be restored within this same period were used to bolster private economic development and preserve state public sector jobs.

The 2009 economic stimulus was credited with preventing the recession from growing worse. Recent data suggests that national unemployment would have reached 16 percent without it.(15) The effects of the stimulus were blunted, however, due to the relatively small amount allocated in 2009 – totaling $787 billion – in addition to the refusal of states to raise taxes to make up for declining tax revenues.(16) Total state budget gaps for the fiscal year are projected for 2011 at $84 billion.(17) This means that, if the Bush tax cuts were allowed to expire, the revenues gained from them (from 2010 and 2011) are far more than enough to fill all currently existing state budget deficits for the next ten years (assuming the deficits remained at current levels, which they most likely would not once a full recovery took place), while still leaving an additional $2.76 trillion dollars left over to promote further economic recovery.

Business apologists will no doubt complain that the restoration of pre-Bush tax levels will stifle business initiative, investment in the economy and future growth. They argue that only by pushing tax cuts for business and the rich can economic recovery occur. These claims are difficult to take seriously considering that American corporations have returned to pre-2008 profit levels, while systematically refusing to invest in the economic growth needed to decrease unemployment from near historic highs. The top banks in the country were rescued under the TARP taxpayer funds under the assumption that they would begin to loan money to jump start the economy. They refused, preferring to take the money to pay CEO bonuses and buy up their competitors. The Bush tax cuts were intentionally frontloaded with benefits for the masses of Americans, with the vast majority of cuts for the wealthy (which constituted the bulk of the tax cuts under Bush) appeared only in the later years of the tax cut timeline laid out in 2001.(18) The Bush tax cuts, like the TARP funds, have not been used in the last few years to help bring about an economic recovery. These cuts are set to expire this year and renewing them will likely do little to nothing to promote recovery if they have had no effect up until this point.

In short, the Bush tax cuts are a non-starter when it comes to pulling the economy out of recession. Corporate executives, rather, have taken the money and held it in reserve instead of investing it in future growth strategies. The business class systematically refused to invest this money (in addition to the money loaned out through the TARP program), as reporting spotlighted following the 2008 economic collapse.(19) Why the American taxpayer should quietly sit by and extend further tax cuts to the rich is a question that has not been addressed by the Republican Party, in addition to much of the Democratic Party. The commitment to tax cuts is more a reflection of pro-business dogmas than sound economic reasoning.

Corporate America is flush with cash today, largely from the tax cuts and because businesses are pushing workers to increase their productivity levels, while suffering under deteriorating wages. At the same time, corporate CEO to average worker pay disparities have grown dramatically in recent decades.(20) It is the squeezing of the American worker, rather than reinvestment in growth oriented initiatives, that has allowed for the return of high profitability levels. Evidence of this is seen in the return of 2007 profitability levels, accompanied by the decline of worker pay in the last few years.(21) The return to high profits among corporate America and the declining of pay of workers appears quite perverse in light of recent economic stagnation, with economic growth totaling just 2.4 percent in the second quarter of 2010, down from 5 percent in late 2009, and 3.7 percent at the beginning of 2010.(22)

Amid all the suffering, corporate America is sitting pretty today. They’ve been hoarding money for some time now, refusing to reinvest in productive economic activities. Robert C. Pozen, a lecturer of business at Harvard University, warns, “because of high unemployment, management is using its leverage to get more hours out of workers … what’s worrisome is that American business has gotten use to being a lot leaner and it could take a while before they start hiring again.”(23) The New York Times reports that, although companies have raised profits amid declining sales, “the problem is that companies are not investing those earnings, instead letting cash pile up to levels not reached in nearly half a century.”(24) Ethan Harris, the chief economist at Bank of America-Merrill Lynch, argues, “as long as corporations are reinvesting, the economy can grow … but if they’re taking those profits and saving them, rather than buying new equipment, it hurts overall growth. The longer this goes on, the more you worry about income being diverted to a sector that’s not spending.”(25)

There is one way to get business and financial elites to reinvest in the economy – take the money from them. This policy option is, after all, the law, considering that the Bush administration explicitly set up their tax cuts to expire by the end of the 2000s. The Bush tax cuts will only be allowed to continue if the Democratic Party (or a split government following the midterm elections) agrees to extend them. We have a real chance over the next year to take a stand against corporate corruption and greed. Americans can demand that the Bush era tax cuts for the rich come to an end, or they can sit by and watch while Republicans (and conservative Democrats) push for their extension. The latter path will spell disaster for America’s working class, while the rich will be left laughing all the way to the bank.


1. Richard W. Johnson, Barbara Butrica and Corina Mommaerts, “Work and Retirement Patterns for the G.I. Generation, Silent Generation and Early Boomers: Thirty Years of Change,” Urban Institute, 9 July 2010.
2. Dean Baker, “Cut Social Security to Pay for War?,” Counterpunch, 2 July 2010; Media-ocracy, “Under the Radar: The Bi-Partisan Plan to Cut Social Security,” Media-ocracy Magazine, 5 July 2010.
3. Reuters, “Congress Votes to Restore Unemployment Benefits,” New York Daily News, 22 July 2010.
4. Russell Berman, Alexander Bolton and Julian Pecquet, “Pelosi Calls on House to Return Next Week to Move $26B State Aid Package,” The Hill, 4 August 2010.
5. Jean Marlar, “Underemployment Rises to 20.3% in March,” Gallup, 1 April 2010.
6. Dean Baker, “Double Dip Recessions and the Strange Tale of Final Demand,” Z Magazine, 4 August 2010.
7. Hibah Yousof, “Personal Savings Rate Climbs to 1 Year High,” CNN Money, 3 August 2010.
8. Ethan Pollack, “Stagnant Wages, Rising Inequality,” Economic Policy Institute, 2008; Bureau of Labor Statistics> “Labor Productivity and Costs,” Bureau of Labor Statistics, 2009.
9. Pollack, “Stagnant Wages, Rising Inequality,” 2008; Marin Clarkberg, “More Dual Earner Couples, Working Harder than Ever,” United States Department of Labor; “Current Population Survey, 1968-2009 Annual Social and Economic Supplements – Real Median Household Income by Race and Hispanic Origin: 1967-2008,” US Census Bureau, 2009; “Dual Earners, Double Trouble,”, 13 November 2000.
10. Anthony DiMaggio, “Class War Inc.: Behind the Corporate Scam to Get You to Work Harder for Less Money, Media-ocracy Magazine, 29 July 2010.
11. David Cay Johnston, “Income Gap is Widening, Data Shows,” New York Times, 29 May 2007; Andrea Orr, “A Long and Persistent Middle Class Squeeze,” Economic Policy Institute, 3 February 2010.
12. Lawrence Mishel, “Corporate Profits have Recovered, but Job Market Still Depressed,” Economic Policy Institute, 14 July 2010.
13. Tax Policy Center, “Expiration of the Bush Tax Cuts,” Urban Institute/Brookings Institution, August 2010.
14. Alan Barber, “Prerecession Unemployment Rates May Not be Reached for a Decade,” Center for Economic and Policy Research, 20 July 2010.
15. Media-ocracy News Report, “Debt Inc.: Why Warnings About Unsustainable Borrowing are Code for Class War,” Media-ocracy Magazine, 6 August 2010.
16. Dean Baker and Rivka Deutsch, “The State and Local Drag on the Stimulus,” Center for Economic and Policy Research, May 2009; Jon Hilsenrath, “State of Economy Hinges on Fight Over Stimulus,” Wall Street Journal, 26 July 2010; David Leonhardt, “Stimulus Counterfactual,” New York Times, 26 July 2010.
17. Deborah Levin, “State Budget Gaps Total $84 Billion for Fiscal Year 2011,” Market Watch, 27 July 2010.
18. See Chapter 2 in: Jacob S. Hacker and Paul Pierson, Off Center: The Republican Revolution and the Erosion of American Democracy (New Haven, Connecticut: Yale University Press, 2005).
19. David Weidner, “Why Banks Still Aren’t Lending,” MSN Money, 23 April 2009; David Ellis, “Big Banks Still Not Lending,” CNN Money, 15 June 2009; Binyamin Applebaum, “Despite Federal Aid, Many Banks Fail to Revive Lending,” Washington Post, 3 February 2009.
20. Jeanne Sahadi, “CEO Pay: 364 Times that of American Workers,” CNN Money, 29 August 2007.
21. Nelson D. Schwartz, “Industries Find Surging Profits in Deeper Cuts,” New York Times, 25 July 2010.
22. Lisa S. Mataloni, “National Income and Product Accounts: Gross Domestic Product, Second Quarter 2010,” Bureau of Economic Analysis, 30 July 2010.
23. Schwartz, “Industries Find Surging Profits in Deeper Cuts,” 2010.
24. Ibid.
25. Ibid.