Barack Obama and the Bush Tax Cuts

Barack Obama and the Bush Tax Cuts (A)

Since we can remember, the US economy has been the picture of stability and envy of many countries. However, events in recent memory have seemingly shaken the foundations by which the US economy stands. The events of 9/11 tempered US economy growth. Account balances were net negatives during the Bush years. A second gulf war cost the US a lot of money. The 2008 financial crisis caused poor employment outlook for the American people. These issues are the base of the dilemma of the Obama administration - Given this state of the post-Bush administration, what should Obama’s economic policies be?

Obama won on the back of his platform of inclusive growth among Americans. He blamed the previous administration of the growing budget deficit and 2008 financial crisis. His promise of inclusive growth entails a redistribution of wealth from the top earners to the everyday Americans. Obama promised to revoke Bush Tax Cuts (BTC) among the wealthy and make further cuts among the working class. The case shows that some analysts believe that the BTC did not have a progressive effect as desired. According to these experts, the tax alleviation on the everyday American (1.5 percentage points) was less versus the top 1% (6.8 percentage points).

Taxation is a very contentious issue and rightfully so. Taxes are the source of revenue for the government. Tax cuts plausibly reduce government revenues because of lower collections. However, lowered taxes may also cause an increase in consumption due to increased disposable income. This makes cuts a highly populist move by politicians. Increased consumption also plausibly leads to more investment that leads to greater job creation. This cycle, though seemingly desirable, has some unintended consequences. Too much consumption and job creation will lead to over inflation caused by aggregate supply not meeting the aggregate demand of the economy. Effects of increased investment usually happen after some delay hence a mismatch of the timing of aggregate supply and demand. We also cannot predict the consumption habits of Americans. Americans might have the tendency to prefer imported goods since they are cheaper. If the preference is skewed towards imported goods, there may be an additional impact on the US’ trade deficit due to the disparity versus exports.

US government spending has increased with each passing year since the Bush Administration. Financing the second gulf war, modernization of social security benefits and Obama’s planned bail-out and stimulus packages have added significantly to government spending. Unfortunately, these increased expenditures have coincided with the BTCs. This has caused the US to finance their expenditures through more and more debt. Future generations will have to pay this debt later on.

While Obama blamed the Bush administration for the 2008 financial crisis, it is difficult to pinpoint Bush’s policies as the culprit. Most can agree however that the main driver was greed in Wall Street. Bankers acted with impunity underwriting bad securities and taking huge risks. The banking industry’s regulations were placed under scrutiny for letting the 2008 financial crisis happen in the first place. Given the issues presented, we recommend the following potential solutions or platforms for the Obama administration: to develop and implement an austerity program for the government, and continuous tax program.