Watching politicians attempt to find a balance between taxation and government spending is a lot like watching a swarm of vultures all stalk the same prey: the prey usually ends up mauled beyond recognition, and no one is left satisfied. Some politicians might say the country is headed for the same fate, unless the Bush tax cuts are either extended or left to expire in December. Before we address this issue, let us take a step back and examine the circumstances that brought about these currently-controversial tax acts.
In late 1999 and early 2000, George W. Bush (R) was running for office against stout competition in Al Gore (D) and Steve Forbes (R). Part of the Bush campaign platform was based around letting the American public keep more of the money they earned. At the time national debt was (relatively) low, and keeping with campaign promises the Bush Administration enacted a first round of cuts in 2001. Though there were dissenters, the main sticking point of the arguments against the cuts were how and amongst whom the cuts were to be divided; it seemed little attention was paid to the impact of this legislation on the future debt-load of the country. The major discussion was focused on who was to be allowed the most tax breaks. In 2003, the story repeated itself: politicians, concerned for their constituents (and indirectly themselves), spent more time debating who tax cuts should be applied to than IF they should be applied at all.
Partly because of fiscal spending, the national deficit is now estimated at $1.2 trillion and total national debt at $14.1 trillion. With the Bush Tax Cuts set to expire soon, today the debate swirls around whether they should be extended or allowed to end. However things are different now, in the wake of significant economic downturn, than when the cuts were first proposed. Some economists argue that extending the cuts is a way to keep people spending and avert another dip into recession; others say that our deficit cannot sustain the lost tax revenue, and the tax cuts must expire to help mend a broken budget.
An older idea that has been re-posed is that of a value-added tax, which could act as a blanket sales and spending tax and could potentially replace income and earnings taxes. The thought is that a value-added tax might encourage people to work and save more by taxing them only based on what they purchase. Some say that this hurts the lower class, which generally spends all of their income, but proponents argue that such a tax could be designed to avoid this pitfall.
Most important to take from all of this is an understanding that there are two directions we can attempt to pull and push the economy from: spending and taxes. If we try to lead from both directions simultaneously, we may find ourselves without the energy to fly away.
Joseph “Big Joe” Clark is a Certified Financial Planner and the Managing Partner of the Financial Enhancement Group, LLC.