Thursday, November 11, 2010

Extending the Bush Tax Cuts

Coming off a mid-term election which saw his Democratic majority in the House of Representatives disappear, President Barack Obama has indicated he is willing to compromise with Republicans in extending President Bush's tax cut package from 2003 for all Americans. Initially, Obama was hesitant in supporting an extension of the tax cuts for the wealthiest Americans, but it appears that the will of the people made clear during the mid-term elections will win out: Americans want less spending and lower taxes across the board.

This news is important on two fronts. First, if the tax cut extension is indeed passed, it will help spur economic growth like Bush's tax cut packages did in 2001 and 2003. In 2001, the tax cuts helped fuel growth coming off a recession and in 2003, the cuts helped perk up the labor market. By extending the tax cuts across the board, there will be more wealth and capital flowing through all areas of the economy. It's easy to vilify the "rich", but many of the people who make up this class are small business owners who employ millions of workers. Since they are paying a majority of the taxes in the U.S., by penalizing them in a recession in the form of higher taxes, we're also hurting the labor market in the process.

Secondly, from an investment standpoint, lower taxes will spur investment, particularly if the capital gains and dividends tax rates stay at their Bush-era low rates. These rates will create extra incentive to investors to provide much-needed capital to businesses which in turn will also help economic growth. Low taxes are crucial to support both economic activity and to enable individuals to save more of the wealth they've earned.

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