An Independent perspective on the tax cut debate

The partisan lines in the debate over extending Bush’s tax cuts are clear at this point: (most) Democrats want tax cuts for the middle and lower class, but not for the wealthy- the top two percent of income earners in the country. Republicans on the other hand, want tax cuts for everyone, including the wealthy, no exceptions.

The media hailed a breakthrough in the tax cut controversy when the White House proposed extending tax cuts for everyone, including the wealthy, in exchange for extending unemployment benefits. The House Democrats, however, revolted against the compromise, determined to let the tax cuts for the highest income earners expire at the end of this year.

The Capitol looks so gridlocked, even behind party lines, and so desperate to make headway on the issue, that we’ve even been treated to the truly bizarre spectacle of President Clinton standing in for President Obama during a press conference to defend the White House’s tax cut proposal. What next? George W. Bush taking the podium and begging Congress, on Obama’s behalf, to make his tax cuts permanent?

So if Washington can’t decide, perhaps it’s worth considering a totally independent perspective, something entirely outside the bipartisan dichotomy, with its narrow focus on the top two percent of income earners and whether or not they should keep their tax cuts. There is another fiscal issue of arguably greater import, and that is our exploding national debt.

Restricting the national conversation to tax cuts effectively prevents any real fiscal reform from ever happening on Capitol Hill. That’s because cutting taxes without cutting spending isn’t really cutting taxes at all. It’s deferring taxes to the future.  Imagine yourself in financial trouble, worrying over how much of your expenses you should pay with cash and how much you should pay with credit cards, but you never even consider reducing your expenses. The “debate” over tax cuts in recent months is about that absurd.  And when you cut taxes without cutting spending (or worse, while growing spending), you subject taxpayers to an even greater financial obligation than if you had not cut their taxes at all.

Deficit spending hits taxpayers three times:

First, when the Federal Reserve loans the Treasury money, it does so by printing money, which inflates the money supply and causes dollar devaluation, so that taxpayers have to cough up more of their paycheck than they did last year and last decade to buy the things they need and to pay their bills.

Then, the taxpayer is still on the hook to pay the Fed back for all that money the Treasury borrowed on our behalf. They didn’t just print it and spend it; the Fed printed it and loaned it to the government. Taxpayers have to repay that loan eventually, so Congress never really cut their taxes at all.

Finally, when taxpayers repay the debt, they have to do so with interest. So arguably, “cutting taxes” while spending the same amount is actually raising taxes, because the taxpayer will have to pay more in the end than if they had just paid for the government’s expenses up front with no interest payment on top of it.

So, while Congress and a gullible media distract us with a debate over “cutting taxes,” the government is actually increasing our financial obligations and handing us a bigger burden to shoulder. The only true tax cut is a spending cut, and despite the Tea Party’s influence this last midterm, we’re not hearing much out of Washington so far about substantial spending cuts.

With the Capitol gridlocked and undecided as Bush’s tax cut expirations loom, perhaps a real compromise would involve the Republicans backing down on extending tax cuts for the top two percent of earners if Democrats agree to help them enact across-the-board spending cuts. That would actually lay the foundation for a genuine economic recovery.