Ducks in 10-Gallon Hats - Fighting Over Our Money

Members of Congress are getting ready to suit up in their chaps, spurs and ten-gallon hats.  Oh, and don't forget their bills...  duck bills...  lame duck bills.  We're getting ready to watch a lame-duck Congress, dressed for a show-down at the OK Corral, come back into session for a shoot out - the outcome of which will determine all of our tax bills for the near future.

Unless this current Congress acts, the "Bush Tax Cuts" will expire on December 31, 2010.  Democrats are poised to support extending the cuts for those individuals earning less than $200,000 annually and families earning less than $250,000.  The Republicans, alternatively, advocate extending the tax cuts permanently and for all tax filers.

Both parties, by advocating extending tax cuts at all, are agreeing that lower tax bills equate to more money in consumer's pockets, leaving more money for other expenditures, thus driving the economy.  The argument has been, and will continue to be over the costs and benefits of extending the cuts for higher-income individuals.

Here's a great chart showing the possible tax rate outcomes:

From my perspective, what is at odds is the expected value, to the economy, of putting more money (or said otherwise leaving more money) in the pockets of the country's wealthiest citizens.  When taxes are cut for all, obviously the wealthy, like the less wealthy, will spend more as consumers (granted likely on more luxury items) since they have more money in their pockets.  But consumer spending is not the only potential impact of lower taxes if extended to wealthier Americans.  Americans in top tax brackets also own small businesses - lower taxes can mean more reinvestment in business growth, and thus subsequent job growth.  Also, wealthier Americans are more likely to make size able investments to grow their wealth - funds that are valuable capital for companies.  Availability of capital is the key to growth, and just like small business owners, the more money a business has, the more they can spend on growing business - growing jobs.

Alternatively, tax cuts cost the federal government revenue.  Money that doesn't come in through the treasury can't be spent by the government (if you, for a fleeting moment, forget that our country runs huge budget deficits) and if budgets are balanced, reducing tax revenue must come with equal reductions in spending.  It's estimated that the current tax "cuts" (when compared to the alternative rates), if made permanent, would cost the federal government $3.7 TRILLION over 10 years.  That's a lot.  

When people talk about the "cuts" and extending the "cuts" we have to remember that NOT extending the cuts doesn't mean people keep paying the same tax bills, but in fact, tax bills will INCREASE for Americans.  This is an obvious concern for an economy that remains extremely dependent upon consumer spending.  If people's wallets get even slimmer through what amounts to tax increases, the economy is further threatened.

Also of note is the amounts of the $3.7 trillion price tag that is attributable to the wealthy versus those who come in in the lower tax brackets.  $3 trillion of the cost would come from the people the Democrats want to extend tax cuts for.  Only $700 billion comes from the wealthiest Americans.

The best choice on this matter is not clear, and will be fought fiercely in Tombstone D.C.  

Here are the basic options: 

1. Let the tax cuts expire and you threaten the already teetering (though arguably recovering) economy by reducing dollars individuals have available for consumer spending (or heck, to pay their mortgage - let's not forget about the housing market still buried a the bottom of an port-o-potty), and money available for investment or reinvestment in businesses (which drives jobs growth). 
2. Extend the tax cuts for the majority of Americans (raising taxes on the wealthy) and you cost the federal government $3 trillion over ten years, and only really extend the status quo for those who get the cuts.  In this scenario you at least do bring $700 billion into the federal coffers (remarkably close (but still less) to the cost of the last federal stimulus - through spend in a MUCH shorter timeframe - which many argue another stimulus is needed) but federal deficits will continue to rise quickly without any real changes to federal spending.
3. Extend the tax cuts for all Americans, which costs about 25% more that just for the non-wealthy, preserving all consumer spending and current investment rates, but costing the federal government the full expense of the reduced revenue.

Extending the tax cuts is not a fix for the economy, but certainly could hurt the economy greatly if nothing is done and they expire completely.  Alternatively, extending the tax cuts costs us all trillions more in deficits and debt.  The downside of huge debt I'll save for another post...

And so, we're back at the OK Corral.  Boehner and Pelosi are taking up their positions, and pointing their pistols at one another.  I wonder who has the bigger hat?  I just hope neither of them shoots a whole in my wallet...