In the last week we have heard that the Democrats in Congress have decided not to pass a budget resolution this year. "Big deal," some say; after all,the budget resolution is not binding, so why waste the energy to carry out this politically dangerous task. In truth, there is a big reason why -- without a budget resolution there can be no bills passed by reconciliation in the Senate since you cannot reconcile a law to the budget if there is no budget.
After last month's healthcare battle, it is clear that the Democrats know the importance of reconciliation. But perhaps they are not thinking ahead. In truth, the big battle coming for the rest of the year in Congress will be tax policy. Starting next January, the Bush tax cuts expire. This means that those who have the highest incomes will see their taxes rise from a marginal rate of 35% up to one just over 39%. It also means that those who are in the lowest brackets will see their taxes rise from 0% or 10% to 15%. Everyone in the middle will also see a tax rise. Barack Obama campaigned on the promise that only those with incomes over $250,000 will have their taxes raised. While Obama has already broken this promise repeatedly with the new taxes in the Obamacare law, he has not directly allowed income taxes to rise for those who have less than stratospheric incomes. Absent congressional action to pass new tax rates, however, about 65% of all American households will see their tax bills rise.
By not passing the budget, Congress is giving the Republicans in the Senate veto rights on any new tax legislation. Those Republican Senators can work together to insist on the new tax rates being set at levels that make sense for the economy, not the counterproductive tax levels advocated by the Democrats. Republicans will not be able to force through pre growth tax policies, but they certainly can prevent Obama from pushing through his economy killing changes to the tax structure.
Had the budget been passed, the Democrats could once again use reconciliation to get their tax legislation passed with no Republican support. Now it is too late. The Democrats mistake may be a big blessing for the country. Indeed, it would be even better if no tax bill were passed in 2010 and the matter left to the next Congress which will convene in 2011. It is all but certaiin that there will be many more people in that congress who recognize that the economy needs to be nurtured by the acts of the federal government and not just torn to shreds like Obama and the Obamacrats have done.
One last note, for those who think that big spending and tax rises are the way to go to fight economic problems, I would point out that the last time that the US government raised taxes in bad economic times was in 1933 and 1936. These tax rises were accompanied by huge increases in government spending. The result in both years was a major decline in the economy thereafter. The Great Depression was on Great because of the policies followed by FDR and the Democrats. Indeed, there was a second leg to the depression in 1937 that was clearly a direct result of the further increase in taxes passed in 1936. And even so, the policies followed by Roosevelt were better than those of Obama. FDR had the government spend on infrastructure improvements like dams, roads, post offices, bridges, harbors and tunnels. These investments in America's capital structure made later growth easier. Obama's stimulus used less than 20% of its expenditures for these so-called shovel ready projects. Instead, most of the funds went to pet projects for Democratic interest groups like college faculty who got grants to study things like insect mating habits. The biggest chunk of the funding went to states and local governments to keep government workers on the payroll for a longer period of time; and we all know how productive these government workers are -- they contribute nothing to the growth of the economy.
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