Criticism of the tax deal that President Obama struck with Republicans is understandable. Income and estate tax breaks for the wealthiest Americans would increase the deficit at a time when we need to create jobs, not dole out dollars to people who already have plenty of money.
As of this writing, it appears the tax deal will go forward. Without the agreement, middle class income taxes would rise, while millions of Americans would see their unemployment compensation expire with no immediate prospects to land a job.
As President Barack Obama so aptly said, Senate supporters of tax cuts for the wealthy were holding the middle class hostage. In their resolve to nail down tax cuts for their wealthy admirers, right-wing legislators seemed aloof to the pain of those well down the income ladder.
There is no valid economic rationale to cut the estate tax to 35%, however. Estates are passed down to people who did not create those estates–and therefore should pay all the tax that is coming to them.
Likewise, there is no reason to extend the life of tax cuts for the top 2% of taxpayers. We can expect that song to be sung again in two years, when the “temporary” cut once again approaches its expiration. The lyrics will be the same old tired refrain: Tax cuts for high income individuals create jobs.
Here’s why that is not true: wealthy Americans do not cut down on spending just because their taxes go up. If they think there is money to be made, they will spend–regardless of their tax rate. The reason they are not hiring or spending on equipment or supplies right now is because consumers are not buying.
As Warren Buffett told ABC News in November, trickle-down theory “has not worked the last 10 years, and I hope the American public is catching on.” Buffet joined a group, Patriotic Millionaires for Fiscal Strength, which has asked President Obama to bring an end to the Bush tax cuts for the wealthy.
Tax cuts for the working stiff are another matter. When a working stiff gets a tax break, he or she spends that extra money on goods and services. That is what creates jobs.
Eliminating the Bush tax cuts would return the top income tax rate from the current 35% to 39.6%, where it was when the economy was booming. Those earning incomes between roughly $172,000 and $374,000 would see their tax rate climb from 33% to 36%.