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Cut the Tax Cuts

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For several years now we have been told that the Bush tax cuts will be expiring at the end of 2010. That time is now here — unless Democrats and Republicans in Congress can reach an agreement to extend them.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) are responsible for our current income tax situation of six brackets of 10, 15, 25, 28, 33, and 35 percent, a $1,000 child tax credit, a long-term capital gains rate of 15 percent, a qualified dividend tax rate of 15 percent (0 percent for those in the two lowest tax brackets), a section 179 expense deduction of up to $250,000 for small businesses, and an estate tax that has now been eliminated.

If the Bush tax cuts are not extended, the current six brackets will decrease to five: 15, 28, 31, 36, and 39.6 percent, the child tax credit will decrease to $500, the maximum long-term capital gains rate will increase to 20 percent, qualified dividend income will be taxed as ordinary income rather than at the lower long-term capital gains rate, the section 179 expense deduction will decrease to a maximum of $25,000, and the estate tax will return with a 55 percent maximum rate and only a $1 million exemption.

President Obama and Republicans and Democrats in Congress all agree that this is unacceptable. If a deal reached between the president and Republicans comes to pass by the end of the year, the tax cuts will be extended for all income groups for two years, payroll taxes will be reduced for one year, certain tax credits will be extended, and the estate tax will be revived with a $5 million exemption and a maximum rate of 35 percent. Compromise between the two parties comes at a price, in this case the extension of unemployment benefits for an additional thirteen months.

The initial issue was extending the tax cuts for “the rich.” The president and most Democrats in Congress wanted to extend the tax cuts only for those individuals making less than $200,000 ($250,000 for married couples). Republicans in Congress, joined by some Democrats, wanted the extension to apply to everyone regardless of income. Now the main issue is the estate tax, with some Democrats calling for a lower exemption and a higher rate. Surprisingly, Republicans are mostly silent about the proposed extension of unemployment benefits.

Republicans have only themselves to blame for the expiration of the Bush tax cuts. During Bush’s presidency, Republicans controlled the Congress from the time of Bush’s inauguration on January 20, 2001, until May 24 of that same year when Senator Jim Jeffords (R-VT) switched from Republican to Independent. Republicans regained control of the Congress in the 2002 midterm elections and maintained their absolute majority until the 2006 midterm elections. This means that Republicans had over four years to make the tax cuts permanent. As usual, the Republicans failed.

But now, at the end of 2010, the Republicans expect us to look at them as saviors for demanding of the Democrats, who still control the Congress, that the Bush tax cuts be extended for everyone.

How generous of the Republicans to stipulate that those Americans who are the most successful — dead or alive — must only turn over 35 percent of their income to the government!

It is no surprise that one of the Republican arguments for keeping the Bush tax cuts intact is that increased tax rates do not necessarily translate into increased government revenue. This is certainly true, as the well-known Laffer curve demonstrates. But Republicans all too often focus on how a reduction in tax rates can actually give the government more revenue independent of decreased government spending. This is because Republicans have no philosophical objection to the income tax— or any other kind of tax. Indeed, as Jacob Hornberger recently explained: “The left-right debate in America over income-tax policy assumes the continued existence of the welfare-warfare state way of life, along with the continued existence of the income tax that funds this way of life.”

Neither liberals nor conservatives are opposed to taxes on principle. Liberals have no problem using the tax code for their various social engineering and income redistribution schemes while conservatives usually prefer that taxes collected be spent to fund U.S. military adventures around the world, anything related to law enforcement or homeland security, faith-based welfare programs, and the war on drugs.

Although on the surface it appears that Democrats generally favor the welfare state and Republicans generally favor the warfare state, it is not that simple. Witness Obama’s escalation of the war in Afghanistan and Republican votes for welfare when the Democrats are not in power. Both parties are hopelessly statist to the core.

So, if the Bush tax cuts ought to be cut, and cut to the point where they don’t increase government revenue, then to what level should they be cut? To the libertarian there is but one answer: the income tax should be cut down to zero. That is, none of the 144,103,375 personal income tax returns filed in 2009 should have been filed. Not a penny of the $1.175 trillion collected from these returns should have been collected. There should be no income tax. Taxation is theft on a grand scale, as the Austrian economist Murray Rothbard explains:

All other persons and groups in society (except for acknowledged and sporadic criminals such as thieves and bank robbers) obtain their income voluntarily: either by selling goods and services to the consuming public, or by voluntary gift (e.g., membership in a club or association, bequest, or inheritance). Only the State obtains its revenue by coercion, by threatening dire penalties should the income not be forthcoming. That coercion is known as “taxation,” although in less regularized epochs it was often known as “tribute.” Taxation is theft, purely and simply, even though it is theft on a grand and colossal scale which no acknowledged criminals could hope to match. It is a compulsory seizure of the property of the State’s inhabitants, or subjects.

But not only is taxation nothing more than legalized theft, there was no permanent income tax in the United States for 125 years. Can anyone possibly say that the government didn’t have enough revenue to function during that time? It wasn’t until the adoption of the Sixteenth Amendment in 1913 that the redistributionist road was paved for an income tax. And what benefits has the increased government revenue from the income tax given us? It is the income tax that has made possible World War I, the New Deal, World War II, the Great Society, the Vietnam War, and our current welfare-warfare state.

But is not a two-year extension of the Bush tax cuts better than letting the tax cuts expire? Certainly it is. Every penny of our money that the government allows us to keep is a good thing, whether it results from a decrease in the tax rates, the lowering of tax brackets, or an increase in deductions, loopholes, exemptions, and credits.

But Republicans shouldn’t be deluded into thinking that they are doing us some great favor. After all, they only call for a reduction in government spending to the level it was during the Bush presidency. That will still require a trillion dollars a year in income taxes.

The income tax system is a vast income redistribution and social engineering scheme. The income tax code doesn’t need to be simplified, shortened, fairer, or less intrusive. The income tax rates don’t need to be made lower, flatter, equal, or less progressive. The income tax doesn’t need more or larger deductions, loopholes, credits, or exemptions. The whole rotten system needs to be eliminated if we are to starve the beast that is the federal leviathan and strictly limit government spending to only what is constitutionally authorized.

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