The Bush tax cuts are set to expire, and some politicians are surprised to learn that most Americans want to see them go.
They shouldn’t be surprised, because they shouldn’t be so out of touch. The Bush tax cuts were too small to matter for most workers. Most people will not even notice the tax cuts expiring except for the news people talking about it.
I remember when the tax cuts first took effect, and how hard it was to persuade people that they, too, had received a tax cut. We had to put the before and after pay stubs side by side and look at them under a magnifying glass. “You see?” I would say. “These two numbers are different. That one dollar and thirty-eight cents is your share of the tax cuts.” “How do you know how to figure these things out?” people would say in response.
The Wall Street Journal, trying to find the worst-case scenario in the pending tax increase, thought they had found it in the case of a single worker with no children and a salary of $80,000 per year. The paycheck would be $61 smaller. That’s big enough to sting, if you notice it, but also small enough to possibly escape notice. And that’s absolutely the worst case. People who make hundreds of thousands of dollars face larger tax increases, of course, but at that income level, there is little connection between income and lifestyle.
So it’s no wonder that, in recent polls, most voters would go along with the expiration of all of the tax cuts. Some, notably including 40 percent of Republicans, actually want to see a tax increase that goes beyond the expiration of the Bush tax cuts.
What would make more of a difference to the economy, however, would be the repeal of the long-term capital gains tax rate. This was something that Bush had a hand in, but it was mostly done before he took office. The distortions created by this tax gimmick are slowly eating away at the productive capacity of the economy, yet things could quickly get back to normal if all special tax treatment for capital gains, in business and investing at least, were repealed.