Tax Cuts

Some random thoughts on the current debate on taxes...

No one who pays taxes knows what their tax situation is going to be come January 1, 2011. This includes not only individuals but small businesses who pay as individuals. For small business owners, that uncertainty means their ability to plan for the future is handicapped.
Which makes them less likely to hire new employees till they find out what's coming.

The debate in Congress rages over whether to extend all the Bush tax cuts, or only those for the middle class. That's odd, because for years Democrats have described the Bush tax cuts as "tax cuts for the wealthy", period. Apparently Democrats have just discovered that the middle class got tax cuts as well.

While it is astonishingly irresponsible for Democrats to fail to bring the tax cut issue to a vote before the elections, there is method to their madness. They do not really want to extend the tax cuts for anyone. How do I know this? Well, Obama keeps claiming that extending cuts for the wealthy will "cost" $700 billion over ten years. He says we cannot afford this cost. According to figures I keep seeing, and per Obama himself, the cost of extending tax cuts for everyone is being pegged at $4 trillion (wow, the middle class must have made out pretty well with the Bush tax cuts). If we can't afford the former, we sure as hell can't afford the latter. My, what are we to do?

Here's what's coming, and in my view this is why Pelosi, et al, have put off a vote on tax cuts. Obama's debt commission is due to issue its report on December 1. I opined earlier this year that they would recommend, among other things, a Value Added Tax. If one buys the bizarre theory that allowing people to keep more of their money is a "cost" that must be paid for, and if extending the Bush tax cuts for everyone will cost $4 trillion, then, according to the theory, we have to come up with $4 trillion somewhere. The commission will propose that if the tax cuts remain in place we must institute a VAT to pay for them.

The end result is that while income tax rates will not have gone up, and Obama will claim that he kept his promise not to raise taxes on the middle class, everyone will in fact be paying much higher taxes. They just won't see those taxes, because they will be embedded in the cost of everything they buy.

Of course, my prediction may prove to be wrong. But I will wager that we will not see a vote on tax cuts till after December 1.