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The Weak Economy versus Burgeoning Deficit Debate and the Dividend Tax Highwire Act

Talk about walking a tightrope.  On Monday we celebrated work in an environment some compare to the late 1930s.  On one hand, we worry about budget deficits that threaten to weaken the value of U.S. Treasury securities (and inhibit our ability to borrow more).  On the other hand, we worry about a labor market that is still the weakest it has been in decades.

The rub lies in the fact that the solution to one exacerbates the other.  Reigning in government spending or increasing government revenue to reduce budget deficits threatens to send a barely-recovering economy into another dive.  But spending federal dollars (borrowed, of course) to promote the consumer spending that will give businesses the confidence to resume hiring threatens to exacerbate already burgeoning budget deficits.

Yet today I read a very cogent articulation of the optimal tightrope walk.  Writing in the New York Times, Peter Orszag, the former director of the White House Office of Management and Budget, argued that "The nation faces a nasty dual deficit problem: a painful jobs deficit in the near term and an unsustainable budget deficit over the medium and long term.  In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether."

I've written both here and in a Phoenix Business Journal op-ed about how important it is for Congress to extend the current dividend tax rate.  I don't think the same urgency applies to all of the so-called "Bush tax cuts" (like those that apply to the likes of Warren Buffett) but Orszag's solution of extending all cuts for two years seems a sensible compromise to me.  If Congress instead raises taxes at the end of the year, and that sends the economy into a double-dip recession, the revenue declines that would generate would be worse for the budget than extending the cuts to buoy the economy.

Broad agreement: Don't raise taxes on the middle class

Last week this was the headline: "Most Economists Favor Extending Bush Tax Cuts."  A survey by the National Association for Business Economics demonstrated some division in thinking about the tax cuts, but generally growing concern about the impact that letting the tax cuts would have on our fragile economy.  From the survey:

  • At least 60% of economists surveyed said lower tax rates on capital gains and dividends should not be allowed to expire for any taxpayers.
  • 22% said the lower rate on capital gains and dividends should be preserved for middle-income taxpayers, but not for the wealthy.
  • 54% of respondents favored extending current individual income tax rates, while 33% favor Obama's plan to let rates rise on the wealthy.

I haven't read any sensible arguments in favor of letting all of the tax cuts expire (what would amount to tax increases at the end of the year), but Treasury Secretary Timothy Geithner makes the case for letting tax cuts expire for the wealthiest 2% of Americans (those making $250,000 or more a year) and extending tax cuts for everyone else. 

I've written before about the compelling case for maintaining the current dividend tax rate at 15%.  In part, it's about helping our utility companies fund desperately-needed infrastructure projects.  But it's also about maintaining important income investments for middle-class Americans - 65% of taxpayers reporting qualified dividends earn less than $100,000 per year, and 36% earn less than $50,000.

In other words, middle class Americans are already suffering enough.  With nearly 1 in 10 out of a job any further weakening of the economy would be devastating.  Yet we all seem to agree that letting the Bush tax cuts expire would do just that - further weaken the economy.  So here's hoping that this fall Congress will eschew partisan politics and do what's right for the American economy - and the American worker.

What's your take?  Write a comment below - no registration required.

Written on Wednesday, 08 September 2010 14:37 by Gary Yaquinto

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