A surprising report from the Congressional Budget Office gives new support to permanently extending the tax cuts enacted under President George W. Bush—dealing a major blow to President Obama’s plans to raise taxes at the end of this year.
In a significant story that receive scant attention from the national news media, CBO Director Douglas Elmendorf says that keeping the Bush tax cuts that affect upper-income taxpayers, small businesses and investors will give the weakened economy a “considerable” economic boost over the next several years and create jobs that will drive down unemployment.
Elmendorf’s conclusions were part of a CBO analysis released recently on the government’s record-breaking trillion-dollar deficits.
“Under that … scenario [keeping the tax cuts at their present levels], economic growth would be stronger next year; unemployment would be lower next year,” Elmendorf said.
CBO’s analysis gives the Republicans new ammunition for its midterm election agenda that calls for extending the Bush tax cuts—a position that has virtually full support within the business community, among major economists, and even a growing number of congressional Democrats, who have been hearing from beleaguered small businesses during the August recess.
Economic growth fell to 2.4% in the second quarter and some economists are projecting that the true rate of growth will be closer to the 1% range when the Commerce Department issues its revised estimate in the coming weeks.
CBO strongly reinforced this more bearish outlook.
“In addition, under current law, both the waning of fiscal stimulus and the scheduled increases in taxes will temporarily subtract from [economic] growth, especially in 2011,” CBO warned Congress.
In another sign of the Obama stimulus plan’s economic impotence, CBO is forecasting a mediocre 2% economic rate of growth in 2011, far from the more robust 3%-plus growth rate needed to make a dent in the unemployment rate.
The comparison between this rate of growth under the President’s spending plan and the faster rates that followed President Reagan’s across-the-board tax cuts in the 1981-82 recession is both startling and instructive.
The Reagan-era quarterly growth rates were 5.1%, 9.3%, 8.1%, 8.5%, 8%, 7.1% and almost 4% heading into the fourth quarter of Reagan’s 1984 reelection campaign for a second term.
In an analysis in the liberal Washington Post, headlined “Reagan’s first term offers measuring stick for Obama”, political reporter Dan Balz went into considerable detail to show how Reagan’s tax cuts were far more successful than Obama’s stimulus spending plan.
“The U.S. economy experienced a growth surge in 1983 and 1984 that helped set the stage of Reagan’s gauzy ‘Morning in America’ ads and prepared the ground for his huge reelection victory,” Balz wrote.
It isn’t only CBO that is touting the Bush tax cuts as the best way to get the economy growing faster again. One of Obama’s top economic advisers is, too.
Just before Christina Romer resigned her post last month as Obama’s chief economic adviser, she and her husband, David H. Romer, wrote an analysis in the recent issue of the American Economic Review that was contrary to the White House’s plan to reverse the Bush tax cuts.
They concluded that “tax increases are highly contractionary” while adding that tax cuts have “very large and persistent positive output effects.”
“Their estimates imply the tax increases would depress GDP (the measure of economic growth) by roughly half the growth rate in this so-far-anemic recovery,” said Stanford economist Michael J. Boskin, who chaired the White House Council of Economic Advisers under President George H. W. Bush.
“If Mr. Obama is really serious about a second stimulus, by far the best thing he can do is have Congress quickly extend the expiring Bush tax cuts, combined with real spending cuts set to take effect as the economy improves,” Boskin wrote in a recent Wall Street Journal op-ed.
A HUMAN EVENTS survey last month of top business trade organization showed intense opposition to raising tax rates, with CEOs and economists warning that it would sandbag the economy and kill job creation.
“A pro-manufacturing tax policy must first acknowledge that when Congress raises taxes, it makes manufacturers in the U.S. less competitive,” said John Engler, president and CEO of the National Association of Manufacturers.
And the National Federation of Independent Business said: “Most small businesses pay taxes on their business income at the individual tax level. With lower individual rates set to expire at the end of 2010, Congress should extend the current rates and ensure that no small business faces a tax increase.”
U.S. Chamber of Commerce economist Martin Regalia said that Obama’s plan to let the Bush tax cuts expire will “be a bullet in the head for an awful lot of people that are going to be laid off and an awful lot of people who are hoping to get their jobs back.”
This was not an idle threat. The number of unemployment claims has been rising at an alarming rate as the economy continues to weaken under Obama’s big spending, slow-growth policies and the threat of higher job-killing taxes to come.
Thus far, the White House and Democratic leaders in Congress appear to be sticking to their game plan to let the Bush tax cuts die this year and to change the subject rather than listen to the complaints of struggling businesses and jobless Americans.
But the verdict on the Bush tax cuts “is still out,” writes Julian E. Zelizer, a public affairs professor at Princeton, in a Washington Post article tantalizingly titled, “It’s Obama’s White House but it’s still Bush’s world.”
“It’s not clear whether [Obama and Pelosi/Reid gang] will succeed; after all, many Democrats are nervous about being tagged as members of the party that raises taxes,” Zelizer writes.
Or as Ronald Reagan would say, “Remember what happened to Walter Mondale in 1984.”