The Political Game Behind Tax Cuts

Should the government cut taxes or raise taxes? This question pops up during every major U.S. election, becoming a major point of contention with Democrats and Republicans. During the economic downturn, debates about tax measures have been particularly heated. In order to win more support and score as many political points as possible, the two parties have launched a battle over tax reform. President Barack Obama, who was attacked by Republicans on the question of reducing spending, now faces obstacles on changing the structure of the government’s financial resources.

Plans to increase taxes on the rich are impossible

The key word in the 2012 presidential election is “debt.” Reducing the huge deficit has become the highest priority of the U.S. government. Increasing taxes is one method, but the question is who should pay more taxes. This has ignited a heated debate between the two parties.

Obama, who has been trumpeting his message to fight for the working class ever since he took office, excluded the wealthy from tax breaks from the beginning. At the beginning of his term, Obama changed the tax cuts implemented during the Bush administration. He lowered the taxes on households whose income was lower than $250,000, and eliminated the tax cut given to the richest 3 percent of Americans. Taking the election as an opportunity to show that Republicans represent the interests of the wealthy and not the middle class, Obama defined his tax reform as taxing the rich and giving to the poor.

In September 2011, Obama announced a $3 trillion long-term deficit reduction plan, which included $1.5 trillion in increased taxes. Individuals and corporations whose annual payroll amounts to over $1 million will have to pay higher taxes. Obama was inspired by investor Warren Buffet’s recent article calling for a new tax policy. Immediately after announcing his policy, he incurred opposition from the Republicans. The Republicans believe that the president is stoking conflict in society, and raising taxes for the rich will only cause investors to take their profitable business elsewhere, which would not provide any benefit to the recovery of the U.S. economy — on the contrary, it would increase unemployment. The Republicans indicated that they would not let this bill become law.

Taxing the wealthy has always been controversial in the United States. Facing every possible obstruction, the Obama administration has decided to compromise. Just before Christmas, Obama said he was willing to give up his plan to increase taxes on millionaires in order to avoid Congress becoming deadlocked and causing a second government shutdown. But in reality, the reason why Democrats are no longer pushing for taxes on the wealthy is because they want to make an agreement with the Republicans on extending payroll tax cuts.

Obama is making gains overall

As the Chinese proverb goes, what one loses in the beginning, one can compensate for later. Obama couldn’t make any headway on the issue of raising taxes on the rich, but he had more success on payroll tax cuts. In September, Obama proposed a $447 billion stimulus plan, which included a measure to extend payroll tax cuts for 160 million Americans for one year and a measure to decrease payroll taxes to 3.1 percent. Statistics from Washington show that the plan will provide roughly $1,500 in reduced taxes to each household paying the payroll tax.

Before Christmas, Congress was debating whether or not to extend the payroll tax cut. The Democrats hoped to temporarily extend the current payroll tax cuts for two more months and continue to discuss and formulate next year’s plan for tax cuts. The Republicans wanted to formulate the tax cut plan in December without any further negotiation.

During the negotiations, both parties added their own provisions to the bill. The Democrats’ ultimate goal is to treat the upper class and the middle class separately; the extension of the payroll tax cut was just a stall tactic. The Republicans seek to extend the tax cuts enacted during the Bush administration, which would reduce taxes for all income levels.

Not surprisingly, when the controversial tax cut bill was presented to the House of Representatives, it was rejected by the Republican-dominated House. Speaker of the House John Boehner said, “Americans are tired of Washington’s short-term fixes and gimmicks and fixes.” He hoped that Congress could pass the payroll tax cut bill now so that the American people would feel at ease. If Congress remains deadlocked, in 2012, the taxes of 160 million working Americans will increase in the span of one month.

In order to help the bill pass before New Year’s Day, Obama worked tirelessly with the House of Representatives before Christmas. He even said that if the bill did not pass, he would cancel his plans to vacation in Hawaii.

Just like the last few times when the government narrowly avoided a shutdown, the two parties reached an agreement at the very last moment. On Dec. 22, Speaker Boehner announced that he and the Senate Majority Leader, Democrat Harry Reid, reached an agreement on a two-month plan to extend the payroll tax cut. Afterward, Obama signed the bill as expected, thus coming to a draw with the Republicans.

Tax reform is a hot topic; interest groups are busy lobbying

Even though the two parties have called a temporary truce on the fight over taxes, analysts believe that the tax issue will be contested even more next year. This is because Congress has delayed the negotiations on tax reform until after next year’s election.

Currently, two Republican candidates for the presidency, Texas governor Rick Perry and former Massachusetts governor Mitt Romney, have both proposed tax reform plans, including simplifying tax laws, decreasing taxes and eliminating the loopholes in the tax system. According to the Washington Post, taxes have become the new battleground.

As the election draws near, American businesses have increased their lobbying efforts to shift the debate in Congress to cover all kinds of taxes. Since the start of 2011, new lobbying groups have emerged which garner support from large companies, such as the RATE Coalition and WIN America Campaign. What these groups have in common is that they are supported by a multinational company whose goal is to lobby and decrease the amount of taxes U.S. companies pay on business activities outside the U.S.

U.S. analysts note that a major tax reform is a major way to reduce the U.S. budget deficit. Total U.S. debt amounted to 100 percent of GDP this year, making tax reform more and more urgent. However, if the two parties are only going to make small changes which are in their narrow political interests and are unwilling to fundamentally restructure finances, it will be impossible to reduce the deficit.