November 2010

Renewing the Bush Tax Cuts is Crucial for Economic Recovery for Iowa and the Nation

By John Hendrickson

“We have tried spending money. We are spending more than we have ever spent before and it does not work,” stated Treasury Secretary Henry Morgenthau, who served in President Franklin D. Roosevelt’s administration.[1] Roosevelt’s New Deal failed to restore the economy and curb unemployment during the Great Depression and Morgenthau’s comments can be applied to President Barack Obama’s economic policies. The nation is still struggling — and even on the verge of a double-dip recession— with economic recovery. Uncertainty is still the word that rules the economy and it is caused by the current and future policies. Unemployment continues at 9.6 percent, while government spending continues to grow with a projected deficit of $1.3 trillion. One of the major factors that is causing uncertainty is whether or not Congress will renew some or all of the Bush Tax Cuts. Failure to renew the tax cuts will result in a massive tax increase that will further hinder economic recovery in Iowa as well as the nation.

In January 2011 the Bush Tax Cuts will expire. The impact of higher tax rates during a period of slow economic growth will not be helpful to the economy or job creation. In a recent Wall Street Journal article the noted economist Arthur Laffer described the impact of the tax increase:

…the highest federal personal income tax rate will go to 39.6% from 35 %, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will occur as a result of the sunset provision in the Bush tax cuts.[2]

President Obama and some Democrats in Congress are arguing that the tax rates for those earning more than $250,000 should expire, which is a policy mistake. Not only is “soak the rich” and redistribution a bad policy, but raising anybody’s taxes in a recession will only prolong economic recovery. In addition, this tax increase would affect many small business owners who will not be able to expand or hire additional workers. Businesses are already struggling with the increase in health care costs because of the new health-care reform law and the extended regulatory power of the federal government.

The Heritage Foundation has recently issued an analysis of the failure to renew the Bush Tax Cuts on Iowa. “The tax hikes would significantly affect the economy in Iowa, most notably in the number of jobs and change in personal income,” noted the Heritage report, The Effects of the Obama Tax Plan on Iowa.[3]  As the report states:

Among the results, from 2011 to 2020, the state of Iowa would lose, on average, 7,561 jobs annually, lose, per household, $2,481 in total disposable personal income, and see total individual income taxes increase $3.6 billion.[4]

The report also breaks down the affects of the tax increase on each of Iowa’s congressional districts. For example the Second Congressional District would “lose, on average, 1,542 jobs annually, lose, per household, $4,369 in total disposable personal income, and see total district-wide individual income taxes increase by $767 million.”[5]

Historically cutting taxes across-the board has resulted in economic growth and in more revenues for the federal government. “The current administration has ignored historical evidence that high tax rates on saving and investment over time erode the growth of productive capital, leading to lower economic growth and job creation,” wrote Richard Rahn, a Senior Fellow at the Cato Institute.[6]

Renewing the Bush Tax Cuts would reduce the uncertainty in the market place and also provide a private-sector stimulus to the economy. Iowa and the nation at large will be better served if Congress renews all of the Bush Tax Cuts. Following a formula of renewing the Bush Tax Cuts, cutting government spending, repealing health-care reform, and curbing regulation will result in ending uncertainty in the economy and creating a pro-business policy that will produce a healthy economic recovery. “Our economy suffers from an accumulating deadweight of taxes, bailouts, subsidies, mandates and restrictions that have had debilitating unintended consequences,” wrote economic historian Jim Powell.[7]

During the 1920s the presidential administrations of Warren G. Harding and Calvin Coolidge followed a formula of tax and spending reduction and the result was quick economic prosperity. Powell noted that as a result of the Harding-Coolidge policies “spending and taxes were cut by 50 percent during the 1920s, and about 30 percent of the national debt was paid off, there were budget surpluses throughout the 1920s, and unemployment fell to 1.8 percent…”[8] In addition, industrial production increased about 70 percent and the economy grew substantially with considerable growth and entrepreneurship.[9]

Full renewal of the Bush Tax Cuts is essential for economic recovery — and combined with spending reductions, further tax reductions, paying down the debt, and repealing health-care reform and regulations — will result in both job creation and solving our financial and spending crisis. The end result will be economic prosperity for Iowa and the nation. 

John Hendrickson is a Research Analyst at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.

[1] Henry Morgenthau, quoted in, Burton Folsom, Jr., New Deal or Raw Deal: How FDR’s Economic Legacy Has Damaged America, New York, Threshold Editions, 2008, p. 2.

[2] Arthur Laffer, “Tax Hikes and the 2011 Economic Collapse,” The Wall Street Journal, June 6, 2010, <http://online.wsj.com/article/SB10001424052748704113504575264513748386610.html#> (October 8, 2010).

[3] The Heritage Foundation, The Effects of the Obama Tax Plan on Iowa, The Heritage Foundation, Washington, D.C., September 20, 2010, <http://www.heritage.org/Research/Reports/2010/09/The-Effects-of-the-Obama-Tax-Plan-on-Iowa> (October 8, 2010).

[4] Ibid.

[5] The Heritage Foundation, The Effects of the Obama Tax Plan: Iowa-Congressional District 2, The Heritage Foundation, Washington, D.C., September 20, 2010,    <http://thf_media.s3.amazonaws.com/infographics/2010/Obama_tax_hikes/IA-2-CDA-obama-tax-plan.pdf> (October 8, 2010).

[6] Richard W. Rahn, “Tax cuts and revenue: what we learned in the 1980s,” The Wall Street Journal, September 25, 2010,

<http://online.wsj.com/article/SB10001424052748703989304575504192870395162.html> (October 8, 2010).

[7] Jim Powell, “Ten Ways to Super Charge the American Economy,” Cato.org, Cato Institute, October 4, 2010,

<http://www.cato.org/pub_display.php?pub_id=12191> (October 8, 2010).

[8] Jim Powell, “Jump-starting the economy,” The Washington Times, September 10, 2010, <http://www.cato.org/pub_display.php?pub_id=12132>  (September 17, 2010).

[9] “Historical Facts,” in Why Coolidge Matters: How Civility in Politics Can Bring a Nation Together, National Notary Association, Chatsworth, California, 2010, p. 164.