The Great Tax Debate

In case you missed it, the Bush era tax cuts are set to expire at the end of 2010. Basically, Republicans are fighting to extend all of the tax cuts while Democrats only want to extend the cuts for those families making less than $250,000 per year. There are a number of arguments to be made for tax cuts but the current situation boils down to two simple problems: uncertainty and bad policy.

Let's start with uncertainty. Right now, we have no idea what our income taxes are going to look like for next year. Will they stay the same as this year, revert to pre-Bush levels, something in between, or something we can't even imagine? Add to this uncertainty a weak economy, the ever-growing national debt, and committee recommendations for tax increases and you have a recipe for very nervous Americans. What do people do when their nervous? I can tell you what they don't do. They don't take out loans so they don't buy things like cars and houses. They don't spend money on things they don't need like a mp3 players, jewelry, and other favorite gifts of the holidays. This fear over taxes is so great that the stock market rallied yesterday just because the politicians got together to talk about taxes.

Then there's the bad policy. I'm not pointing figures at anyone but simply looking at our own history. There are generally believed to be three primary factors that contributed to a recession becoming the Great Depression. These factors are a sharp decrease in the money supply, an increase in tariffs, and a large tax increase in the midst of recession.

Whatever your politics, this is clearly not a time for a tax increase nor a short-term extension of the current tax cuts.