A tale of two very different tax cuts

Published 12:00 am Tuesday, December 13, 2011

By David Post
What’s the difference between a $1,000 tax cut and a $125,000 tax cut?
The $1,000 tax cut is the average savings for all taxpayers. The $125,000 tax cut is the average savings for taxpayers earning more than $1 million per year.
The $1,000 tax cut is based on a reduction in the employee’s share of Social Security tax applicable to all taxpayers. The $125,000 tax cut is based on reduced tax rates at the top of the income scale.
The $1,000 tax cut was first enacted in 2011. The $125,000 tax cut was originally enacted in 2001.
The $1,000 tax cut was originally a one-time, one-year benefit. The $125,000 tax cut extended a 10-year tax cut for two more years.
The $1,000 tax cut is temporary and must expire since the funds are needed for the Social Security trust fund. The $125,000 tax cut has become front and center in a holy war to make it permanent.
The $1,000 tax cut goes to 160 million households or about 80 percent of U.S. households. The $125,000 tax cut goes to 250,000 households or one-fifth of 1 percent of U.S. households.
The $1,000 tax cut will increase the deficit by $160 billion for one year. The $125,000 tax cut is part of a plan that has and will continue to increase the deficit by $400 billion every year.
The $1,000 tax cut is currently stalled as Congress debates how to “pay for” it. The $125,000 tax cut was passed quickly last year without any thought about how to, or whether to, pay for it.
So, what’s happening here?
Actually, neither last year’s $400 billion cut nor this year’s $160 billion cut is really a cut. Both are extensions of prior tax cuts so that if those tax cuts aren’t continued, taxes will go up.
Congress is doing its school bus thing again. Waiting until the last minute. Hoping the test won’t be that bad. Posturing for next year’s election. Trying to measure the political impact rather than the national good.
In the 1930s, the federal government followed the ideas of John Maynard Keynes, who said that deficit spending by the government could spur the economy. When the government either bought more goods or provided dollars to consumers, those dollars would be spent creating the need for more goods and, therefore, the jobs to make and sell those goods.
In an effort to keep deficits under control in the 1980s, Congress created a law called “pay as you go,” or PAYGO. The idea was that if Congress spent additional funds or reduced taxes it had to either reduce other spending or increase other taxes so that the net impact on the deficit would be zero. From a macroeconomic perspective, Keynes would say that the overall impact of PAYGO on the economy should be zero.
Those supporting the payroll tax cut argue that if $20 seeps into everyone’s paycheck each week, they will spend it, resulting in more goods to produce and sell, and more jobs to produce and sell them, a virtuous cycle. Those opposing this tax cut want it to be paid for with spending cuts, eliminating any macroeconomic effect.
Those who support the $125,000 tax cut argue that wealthy taxpayers will spend their tax savings on new businesses that will create jobs, increase taxes and create a virtuous cycle. Those who oppose this tax cut believe that the wealthy will save their money, not invest in new business, and therefore, create no new jobs.
What works? During the 1990s, taxes were increased, and the economy added 22 million jobs. During the 2000s, the Bush tax cut, the largest in U.S. history, resulted in no — that is, zero — new jobs.
One of the best kept secrets of 2011 is that more than 1 million new jobs were created. Was it because of the $1,000 payroll tax cut or the continuation of the $125,000 tax cut? Who knows?
What’s going to happen in 2012? Will a $1,000 tax cut for millions create any new jobs? Not if PAYGO is in the mix. Will last year’s $125,000 tax cut for a few thousand finally — after 12 years — create any new jobs? Who knows?
What we do know is that this Christmas Congress will require that the average Joe pay for his $1,000 tax cut with other government spending cuts even though Congress’ $125,000 tax cut last Christmas to the super-duper wealthy had no strings attached.
That’s the real difference between a $1,000 tax cut this year and a $125,000 tax cut last year.
Gotta love Santa, huh?
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David Post is a co-owner of the Salisbury Pharmacy and an adjunct professor at Georgetown University.