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Biden Wrong: Obama Tax Hike is Only Thing We Can’t Afford

Posted By Kathryn Nix On August 27, 2010 @ 1:00 pm In Economics | Comments Disabled

Vice President Joe Biden is at it again, this time spouting off on his desire to raise taxes through the looming expiration of the 2001 and 2003 tax cuts.

The White House favors extending current tax policy—but only for individuals making under $200,000 and families making under $250,000, allowing rates to increase for the “the super rich.” (A family making $250,000 is doing well, to be sure, but super rich?)

But the bigger logical lapses lie in the White House’s arguments in support of higher taxes. The reality is that there is no reason or excuse to raise taxes on anyone, and it is unreal to do so during a flat economy [1].

Vice President Biden claims that [2] “the country cannot afford $700 billion in cuts for the wealthy.” First of all, allowing current tax policy to continue is not a tax “cut.” When taxes go up, that’s a tax hike. And extending current tax policy for all earners would add an additional $628 billion to the cost of extending the rest of the cuts—less than the stimulus bill and a small fraction of the $8 trillion President Obama’s budget adds to the debt over the next 10 years.

This claim also assumes that exploding deficits are due to lower revenues resulting from the 2001 and 2003 tax cuts. But, as William Gale of the Tax Policy Center [3] points out, the main culprit for currently low revenues “was the recession—and the responses it inspired. As the economy shrank, tax revenue plummeted.” As the economy recovers in coming years, tax revenue will rebound to its historical averages. By 2020, tax revenues are actually expected to be 0.2 percent of gross domestic product (GDP) above historical average [4]—even if the 2001 and 2003 cuts are extended. It is skyrocketing spending—which will be 6.2 percent above its historical average in 2020—that taxpayers can’t afford, not the lower tax rates they have enjoyed for the past decade.

The Vice President goes on to say that the wealthy spend “all they’re going to spend anyway.” Whether that’s true or not is not particularly germane. Biden seems to be implying that only consumption benefits the economy, but when the wealthy save, they are making funds available for others to spend in consumption or investment. A symptom of the confusion in Washington these days is that lawmakers think saving is a bad thing. Heritage budget expert Brian Riedl explains [5] the difference the importance of leaving earnings in the hands of investors:

Consider the 2001 tax rebates. Washington borrowed billions from the capital markets, and then mailed it to Americans in the form of $600 checks. [This] merely transferred existing income from investors to consumers. Predictably, the following quarter saw consumer spending growth surge from 1.4 percent to 7.0 percent, and gross private domestic investment spending drop correspondingly by 22.7 percent.

Finally, the Vice President makes the crucial point that, during a recession, we shouldn’t be raising taxes on small business. But that’s exactly what allowing the tax cuts to expire would do. Heritage tax expert J. D. Foster writes [6] that “while only a small portion of taxpayers reporting small-business income would face Obama’s higher rates, those facing the higher rates are the successful and expanding small businesses that create new jobs the economy needs to grow.”


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URL to article: http://blog.heritage.org/2010/08/27/biden-wrong-obama-tax-hike-is-only-thing-we-can%e2%80%99t-afford/

URLs in this post:

[1] there is no reason or excuse to raise taxes on anyone, and it is unreal to do so during a flat economy: http://www.heritage.org/Research/Factsheets/Obama-s-Tax-Plan-Bad-for-Economic-Growth

[2] Vice President Biden claims that: http://thehill.com/homenews/administration/115787-biden-blasts-gop-arguments-for-extending-tax-cuts-as-malarkey-

[3] William Gale of the Tax Policy Center: http://www.taxpolicycenter.org/publications/url.cfm?ID=1001423

[4] 0.2 percent of gross domestic product (GDP) above historical average: http://www.heritage.org/research/reports/2010/06/federal-spending-by-the-numbers-2010

[5] Heritage budget expert Brian Riedl explains: http://www.heritage.org/Research/Reports/2008/11/Why-Government-Spending-Does-Not-Stimulate-Economic-Growth

[6] Heritage tax expert J. D. Foster writes: http://www.heritage.org/Research/Reports/2010/08/Obama-Tax-Hikes-Defended-by-Myths-and-Straw-Men

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