Recently released GDP figures indicate that the US recession was worse than previously reported and that the stimulus package has had little impact on reducing high unemployment rates, which continue to stagnate at the 10 per cent mark. It is against this bleak backdrop that the senate will launch into a debate on whether Bush’s tax cuts should be extended or allowed to expire.
The debate is scheduled to take place in September and is on its way to becoming the hottest issue this autumn as both Democrats and Republicans prepare to use it as armament for the midterm elections in November. The tax cuts were a signature piece of Bush’s first election campaign and were introduced in 2001 with an expiry date set for the end of 2010, which helped cook the books on possible revenue losses. Obama is keen to keep the tax cuts in place for the 98 per cent of Americans who make less than $250,000 but to let them lapse for the two per cent who make more, which is where the dispute between Democrats and Republicans arises.
The Republicans want to keep the tax cuts in place for the wealthiest 2 percent who currently get a $100,000 tax cut for an income over $1 million. However, their game plan to win the tax debate is based on shifting the focus from this to claiming that Obama is advocating a tax increase that will in fact harm small businesses and thus halt recovery. By turning the debate in to a general tax hike issue the Republicans are using the classic frame of Democrats = tax rises versus Republicans = tax relief to try and get the public on their side. Lost is the fact that only three per cent of small businesses do well enough to be considered eligible to pay the top tax rate. And that extending the tax cuts for the top two per cent of earners would cost the government $700 billion. For the Democrats, it is these two points that form the bedrock of their argument as they attempt to paint the Republicans as champions of the rich at the expense of the average Joe.
There are also some Democrats who question the wisdom of Obama’s decision to extend tax cuts to those who earn less than 250,000. The extension of these middle class tax cuts is going to add $2.7 trillion to the US national debt over the next ten years – a hefty contribution to what is already the largest deficit since World War Two. They argue that businesses will be reluctant to expand and create jobs until the deficit is tackled and fiscal outlook improves. This school of thought is rejected by the Treasury secretary Tim Geithner and the economic Nobel winner Paul Krugman who assert that the middle class tax cuts are in fact a form of stimulus that will give the economy the boost it requires.
In an ideal world such a policy would be part of a wider debate on how to stimulate the economy and would also be balanced by more disciplined fiscal policies to help reduce the budget deficit. But there is little innovative thought coming out of DC on how these issues might be tackled. The Democrats have decided to focus on the tax debate and the Republicans are offering little else. The only policy initiatives the Republicans do put forward relate either to pushing for spending cuts or to unworkable, albeit politically popular, policy ideas that have turned them from deficit hawks in to deficit peacocks, capable of little more than the occasional strut.
The tax issue will be paraded by both sides and will no doubt help one or the other to win votes in the midterm elections. In the meantime the economy will be left to meander along on a rather unpredictable path that could lead to a double-dip recession just as easily as it could to a recovery.
Photo: Charis Tsevis