October 3, 2010 in Business

Square off: Extending tax rates will boost economy

Thomas J. Donohue U.S. Chamber of Commerce
 

WASHINGTON – It has been said a lie can make it half way around the world before the truth can even put its boots on. No one is suggesting that those who advocate for inaction on looming tax increases are lying, but they certainly are misinformed. And the truth is catching up with them.

Even President Obama’s former director of the Office of Management and Budget, Peter Orszag, favors extending current tax rates, at least temporarily. The president’s former chair of The Council of Economic Advisors, Christina Romer, has written persuasively about how “tax increases are highly contractionary” – meaning they weigh down economic growth.

It’s dawning on the public and many members of Congress that raising taxes on anyone is a bad idea in a tough economy. A recent CNBC poll found that 55 percent of the public believe “increasing taxes on any Americans will slow the economy and kill jobs.” A panel of leading economists surveyed by CNNMoney.com also favors extending the cuts for all Americans, as do a growing number of Democrats in the House and Senate.

The truth is, extending current tax rates for all taxpayers is exactly the right medicine for what ails our tepid recovery – it would boost consumer spending, bolster small businesses, relieve the tremendous sense of uncertainty paralyzing businesses of all sizes, and help create jobs.

Nearly all economists would agree on one thing – we will not have a robust recovery until consumers start prying open their pocketbooks.

Consumer spending, after all, represents 70 percent of our economy. Doesn’t it make sense to leave more money in the hands of consumers by extending the tax cuts?

Some argue that high earners – families making more than $250,000 – don’t need their current tax rates extended. In fact, households making more than $250,000 account for almost one-quarter of all consumer spending in a normal economy, according to Mark Zandi, chief economist for Moody’s Analytics. He says increasing their taxes would cost 770,000 jobs by mid-2012. Does that sound like a good idea?

Extending current tax rates for high income earners would also dramatically benefit small businesses, which create 60 percent to 80 percent of new jobs. Why? Because many of them file taxes on their personal returns.

Opponents of extending all current rates cite statistics from the Joint Committee on Taxation, which indicates an increase in the top two marginal rates will impact 3 percent of taxpayers with business income.

While accurate, that number is misleading. The 3 percent figure includes in the universe of small businesses anyone who’s made some pocket change selling things on eBay.

The fact is nearly half of the net income of sole proprietorships, partnerships, and S corporations – the ones creating new jobs – will be subject to higher rates. So those who think they are soaking the rich are really socking it to small businesses.

Extending current tax rates could also help boost investment. At stake are rates on capital gains, which could rise 33 percent, and dividends, which could rise by as much as 164 percent, if current rates aren’t retained. Such increases would discourage investment and hurt taxpayers who receive dividends from investments in retirement accounts.

Extending current tax rates for all tax payers would substantially boost investor, business and consumer confidence and infuse our economy with fresh momentum. It would allow workers to keep more of the pay they earn. It would encourage investment and growth. And it would reward the success of businesses and workers who pour their heart, and dreams into what they do.

Misinformation on extending the current 2001 and 2003 tax rates got a head start out of the gate, but the truth is catching up. It’s time for Congress to do the right thing for our economy, workers, and businesses and extend current tax rates and extend them now.

To contact Thomas J. Donohue, write to him at: U.S. Chamber of Commerce, 1615 H Street NW, Washington D.C. 20062

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