This is not the time for a tax increase. But unless Congress acts, under current law the existing income tax rates will rise sharply at the beginning of next year. Congress should vote now to extend all of the current tax rates for two years, including the tax rates on dividends, interest and capital gains. Limiting the resulting tax-rate cuts to two years would reduce the projected future fiscal deficits. The sooner Congress acts, the stronger our prospects for continued economic recovery, says Martin Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan, a professor at Harvard University and a member of the Wall Street Journal's board of contributors.
A tax increase next year could easily derail the current fragile expansion. The economic upturn since last summer has been nurtured by Federal Reserve credit like the mortgage purchase program and by the fiscal incentives such as the tax credits for car buyers and first-time home buyers that are now coming to an end, says Feldstein:
- Eighty percent of the latest quarterly gross domestic product (GDP) increase consisted of a rise in consumer spending that was the result of an unrepeatable sharp drop in the saving rate.
- Without that decline in the saving rate, the first-quarter annual GDP growth rate would have been less than 1 percent.
- A 2011 tax increase that reduces economic incentives and household spending would raise the risk of a new economic downturn.
President Obama proposes to increase tax rates on high income households while making the existing tax rates permanent for taxpayers below the top tax brackets. While the increase would hit only a relatively small fraction of all households, that group represents a large share of total taxes and of private spending, says Feldstein.
Raising their tax rates would be a substantial blow to overall spending and therefore to GDP growth. Small business investment and hiring would also be adversely affected because half of all profits, including most of small business income, is taxed at personal rates rather than at the corporate rate, says Feldstein.
Source: Martin Feldstein, "Extend the Bush Tax Cuts -- For Now," Wall Street Journal, May 12, 2010.
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