Should the government be cutting taxes now?
When listening to the news regarding the extension of the Bush tax cuts, we continually hear the mantra that these “tax cuts” will be stimulative. In truth, it is not a tax cut at all and therefore we should not expect this bill to be as stimulative as some believe. The bill, if passed, would simply keep the current tax rates in place for an additional two year period. If Congress does not extend the tax cuts, it will result in the largest tax increase in the history of the United States. The financial crisis that we are slowly crawling out of is still tenuous. We believe that raising taxes now in this environment would be punitive and is the wrong thing to do. The old adage that “those that forget history are bound to repeat it” is very applicable to this topic. The financial crisis that we were in was the worst crisis since the Great Depression. Looking back, the government raised taxes throughout the 1930’s – this helped to prolong the pain for a decade. The worst time to raise taxes is during a recession. It follows that the best time to raise taxes is when the economy is booming. Why? Because raising taxes will cause economic activity to slow down. It is best to keep tax rates low and constant so that individuals and businesses can make long-term plans and investments. By keeping the tax rates at these levels for only two years, the bill simply kicks the can down the road. We will again deal with this issue in the 2012 election.
Even though we like most of the items in the tax package, there are two parts of the legislation that are particularly troubling. The first is the one year decrease in the Social Security tax rate and the second is extending the jobless benefits. We believe that the one year Social Security tax cut is just a short-term stimulus (just as the Bush $500 stimulus checks were) that doesn’t add anything to long-term growth. We are also against extending jobless benefits for another 13 months – which is on top of the 25 months already provided. A Danish study that was the basis for Denmark cutting its jobless benefits from four years to two years this past summer clearly explains our position on this subject – it is discussed in the following story from the New York Times: (http://economix.blogs.nytimes.com/2010/08/16/why-denmark-is-shrinking-its-social-safety-net/). We, unfortunately, will once again have to deal with this issue next Holiday Season. We do not oppose this part of the legislation because we are heartless – we are not. We would rather see legislation passed that promotes hiring unemployed workers and provides long-term incentives for employers hiring the unemployed.
All our best for the Holiday Season and we wish you and your family a fantastic 2011!
Your THOR Team
Note: Our next market update will be sent out on January 3.