We’re hearing mumblings about not repealing the Bush era tax cuts for the rich in order to help the economy. This is precisely wrong, and not letting the tax cuts expire and indeed not adding more taxes for the rich is exactly the wrong thing to do for purely pragmatic economic reasons.
The reason isn’t the deficit, though certainly the government needs more money and the best place to get it is from the people who did well during the last 7 years, rather than the people who didn’t get a single raise, the middle class. Rather it has to do with expectations.
Rich people, their accountants, and corporations spend a lot of time thinking about taxes and how to avoid them. They are also capable of understanding the government’s long term economic situation. What they know is that current levels of taxation are below what is needed for the long term fiscal health of the government and the country. Most other western countries tax between 3 to 8 percent more of their GDP than the US does, and the US was in severe deficit even before the huge expenditures related to the financial crisis (of which the bailout is not the largest part, almost 5 trillion has been comitted over the last couple years.)
If you know taxes are going to have to be higher in the future, what you do with money now is you try and pay tax on it now. That means you cash it out now. This is why many corporations paid record dividends all through the 2000′s, rather than reinvesting money in the business: they knew they had to get the money out to their shareholders now. It’s one reason why they paid record salaries and bonuses: they knew they had to pay themselves lots of money now, while it was taxed less, because they knew that in the future they would lose that low tax rate.
What this has meant is that corporations have, in effect, looted themselves instead of reinvesting properly in business. Short term profit has been even more the mantra of the day, because you had to make money and get it out now, while taxes were lower.
Any short term delay in repealing the tax raises will only mean more looting and less reinvestment because the rich will still be able to read a budget statement and know it’s not permanent, no matter what anyone says. The tax cuts need to be repealed as soon as possible to encourage corporations to reinvest and rich people to invest in projects for the long term. Reinvesting for the longer term is good, it’s the sort of money that goes into creating new companies, products and therefore jobs, while short term investment from the rich tends to go into various types of securities games.
Yes, there’ll be slightly less money available for consumption spending, but the rich are lousy at consumption spending anyway. Every dollar given to a poor person or a middle class person provides a lot more short term stimulus than a dollar left in the hands of the rich. And while every dollar less the rich have is a dollar less they can lend to the government, well, if the government has it, they don’t need to borrow it.
So I sincerely suggest that Obama not avoid the repeal of the Bush era taxes on the rich and follow through on his own promise to increase their taxes. It will help the economy, whereas letting them off the hook for taxes will hurt the economy.