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The Coming Tax Hike

When Republicans passed major tax rate cuts in 2001 and 2003, experts predicted a booming economy, new jobs for millions of Americans, and an increase in investment and innovation. The past several years have confirmed the prediction: When government takes less money from its citizens, they invest and spend their money more wisely than Washington bureaucrats.

The 2001 and 2003 tax reductions have spurred more than five years of uninterrupted growth. Since August 2003, our economy has created more than 8.2 million jobs, and the current unemployment rate is just 4.5 percent, lower than the averages of the 1960s, 1970s, 1980s, and 1990s. Wages have been on the rise, and real after-tax income is up 9.9 percent since President Bush took office, an average of nearly $3,000 per person.

These tax rate cuts did not reduce the amount of revenue going to the state and federal governments. The tax relief has helped produce an economy that has generated higher than expected tax revenues. Tax receipts have risen 37 percent over the last three years and are projected to increase another seven percent this year. These rising tax receipts have, in turn, helped drive down the deficit, which is projected to drop significantly in 2007 for the third year in a row. The deficit this year is expected to measure just 1.5 percent of GDP, considerably below the average of the last 40 years.

So, the tax relief not only helped American families and businesses -- it has spurred growth and innovation and created jobs and opportunities for millions of Americans. But continuing this growth requires continuing the policies that have produced this growth in the first place. Failing to extend the tax relief we have passed would result in a tax hike that could cripple our economy and undo much of the progress we have made.

Lowering taxes on income and investment encourages people to work more and invest more, because they get a greater return on their work and investments. This extra work and investment creates new jobs, increases productivity, and encourages innovation and development -- in other words, produces economic growth.

Raising taxes, on the other hand, has the opposite effect. As rates increase, the rewards of labor and investment decrease. People see more of their income and the returns on their investments eaten up by taxes, and this gives them little incentive to work more or invest more. Without new labor and investment, economic growth grinds to a halt, and the economy stagnates.

Unfortunately, the Democratic majority in Congress has written a budget that fails to extend the bulk of the 2001 and 2003 tax relief -- most of which is set to expire in 2010 -- resulting in a staggering tax hike of at least $736 billion.

In addition to this prospective massive tax hike, Democrats on the House Ways and Means Committee are also proposing another growth-stifling tax hike to pay for alternative minimum tax relief, this one a four point tax hike on higher income Americans and small business owners.

Raising taxes would place a particularly heavy burden on small businesses, most of which are taxed at the same rate as individuals. Small businesses employ half of all private sector employees and have been responsible for 60 to 80 percent of the net new jobs created annually over the last ten years. Burdening successful small businesses with significant tax hikes would jeopardize future economic growth and job creation.

The success of Republican tax relief policies is clear. In contrast, raising taxes -- by allowing tax relief to expire or by passing burdensome new tax hikes -- would threaten the progress our economy has made and discourage future growth. Democrats should remember the millions of taxpayers who have benefited from the tax relief we've passed and work with Republicans to extend the tax relief and reject new taxes.

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