Geithner Versus the Bush Tax Cuts

I’m now convinced that the Obama administration is placing its political agenda above policies that would contribute to the economic recovery that millions of Americans so desperately need. That agenda includes bringing more economic activity under government control, making more people dependent on government, and, generally, redistributing wealth.

I have come to this conclusion after listening to Team Obama’s spokesman, Treasury Secretary Tim Geithner, assert that allowing the Bush tax cuts to expire on December 31, as currently scheduled, is good policy. In truth, raising tax rates when the economy is faltering is counterproductive. It will weaken the economy further. Given the sorry state of the economy—with the jobs markets, credit markets, construction industry, and small-business climate all in states of decline or stagnation—adopting a policy that will exacerbate economic stagnation and increase hardship for Americans is worse than ill-advised. George W. Bush persuaded Congress to lower taxes on income, inheritance, capital gains, and dividends to resuscitate the moribund post-9/11 economy. Those tax cuts helped foster a pickup in economic activity. Today’s economy is moribund again, yet Geithner wants all those taxes to go up at year-end.

There is no justification—theoretical or historical—for such a policy. And it isn’t just free-market economists who believe that raising taxes during a time of economic weakness is counterproductive. Lord Keynes—the famous economist whose 1930s-era theories were exhumed by Team Obama in support of “stimulus” spending programs—maintained that economic sluggishness calls for tax cuts, not tax hikes. (Have you noticed how Keynes is invoked when his theories support what Team Obama wants to do, but they leave him in the closet when his theories conflict with their objectives?)

The historical evidence is also weighted against Geithner. As I have written before, the depression of 1920-21 was followed by cuts in both tax rates and government spending, and the economy recovered; by contrast, in the 1930s, both Hoover (Republican) and Roosevelt (Democrat) raised taxes and spending—Team Obama’s identical policy today—and the economic misery was prolonged.

Geithner’s arguments for letting the Bush tax cuts expire were, frankly, devious. He asserted that this step was needed to convince bondholders around the world that the United States is serious about reducing deficits. Apart from the inconvenient fact that raising tax rates often lowers tax revenues (e.g., the 1930s under Hoover and Roosevelt), Team Obama has engaged in a classic bait-and-switch maneuver.

It wasn’t that many months ago when the Obama administration, having jacked up federal spending by almost a trillion dollars in emergency stimulus spending, was talking about scaling back about half of that spending. That was a clever way for Team Obama to convince the gullible that the president and his administration are fiscally responsible, when their actual goal was to lock in a permanent 12-figure increase in federal spending.

Are you hearing any noise from Geithner about reducing Uncle Sam’s out-of-control spending as a means of persuading bond investors that our government is beginning to return to fiscal sobriety? Nope. All of the focus is now on high spending and high taxing—i.e., depression-inducing economic policy in its purest form.

Geithner played the class-warfare card by asserting that the tax cuts would only hurt the top two or three percent of taxpayers. That may be technically true (though even that is in doubt until we see if the other 97 percent of Americans are indeed protected by extending the Bush tax cuts for them), but it is economically untrue. You can explicitly and directly increase tax rates only on the top earners, but the indirect effects of such tax hikes will be profound. The reduction in production and investment caused by tax increases will end up harming many Americans in lower income brackets.

Perversely, the tax hike that Obama and Geithner want would hurt Americans of modest or low incomes more than the rich. In the name of “social justice” and making the rich pay “their fair share,” pro-tax-hike zealots are willing to sacrifice the economic well-being of Joe Lunchbucket. That raises interesting questions: Are the “soak the rich” clique economically blind and ignorant, not knowing what they are doing? Or do they know that their Big Government agenda will cause unnecessary economic pain, yet they are willing to pursue it anyway? Either way, these are some very troubling questions.