Obama Faces Pivotal Decision on Bush Tax Cuts

A key decision President Obama will make in 2010 will likely determine whether he is re-elected in 2012.

Obama will have to decide whether he will renew the “Bush tax cuts” — his predecessor’s 2001 sweeping tax reduction program — that are scheduled to expire at the end of the year.

If these tax cuts are allowed to expire, most working Americans will see a dramatic de facto tax increase. The Bush tax cuts lowered income tax rates across the board, with the highest tax bracket dropping from an almost 40 percent rate to a 35 percent rate.

Without doing anything, Obama can allow tax rates to rise significantly as the Bush cuts expire automatically. This increase would be disastrous as the U.S. economy recovers from a deep recession.

Investors will become increasingly concerned as the year rolls on if Obama does not make an early and clear signal that he will renew the Bush tax cuts.

During the presidential campaign, Obama initially pledged that he would rescind the Bush tax cuts even before their expiration date. He later said he would allow them to continue until their expiration date if the United States remained in a recession.

It’s clear that both the Obama administration and Congress have been intent on taxing the rich. The healthcare reform bill passed by the House would impose a 5.4 percent surtax on couples with an adjusted gross income of more than $1 million a year to help pay for the cost of the reform bill.

But there are some hopeful signs. CNBC’s Maria Bartiromo asked Treasury Secretary Timothy Geithner whether the administration is “going to allow the Bush tax cuts to expire if we remain in a flat situation, in terms of the economy, and unemployment remains high.”

Geithner responded, “. . . it does not make sense to raise taxes in a recession. So getting growth on track, led by the private sector, is . . . still our most important priority.”

Obama has a third choice: He could extend the tax cuts for middle-income Americans while allowing the cuts to expire for the wealthiest taxpayers. Such a decision would be in keeping with his anti-wealth approach, but I believe even this move would be catastrophic, hurting investment, deepening the recession, and possibly leading to a stock market crash.

So-called rich Americans drive the U.S. economy with their consumer spending. It has also been shown time and again that cutting taxes, including those of the rich, does not result in lower government revenue but instead actually increases revenue.

The tax cuts President John Kennedy proposed in the 1960s spurred economic growth and led to a one-third increase in tax revenues, adjusted for inflation, over a four-year period.

The across-the-board tax cuts the Ronald Reagan administration implemented beginning in 1981 led to a doubling of total tax revenues by 1990 and helped spur the greatest economic boom in U.S. history.

And despite our economic woes now, even the Bush tax cuts have boosted revenues. With the wealthiest Americans enjoying lower rates and therefore seeking fewer tax shelters, taxes paid by millionaire households rose from $136 billion in 2003 to $274 billion in 2006, according to The Wall Street Journal.

The problem, in terms of the deficit, wasn’t caused by the tax cuts, but by Bush’s massive increase in federal spending. Everything from entitlement programs (such as the $600 billion prescription drug program) to defense (wars in Iraq and Afghanistan will cost taxpayers well over $1 trillion), pushed the U.S. closer to the economic brink.

President Obama now has an opportunity to show that he is not an ideologue, but a pragmatist who sees what needs to be done to strengthen the economy.