Tax Illogic

Saturday, December 10, 2005

LET'S GET THIS straight. The House of Representatives, committed as it is to fiscal discipline, has made the tough choices and agreed to savings of $50 billion over the next five years from mandatory spending programs. A good portion of this amount comes from programs for the poor. Painful, perhaps, but necessary, you might argue. Except -- and this was no surprise to anyone who's been watching this masquerade of budgetary responsibility -- having muscled through these spending cuts, the House, in the space of two days this week, passed $95 billion in tax cuts. Overall, the House has approved $108 billion in tax cuts this year. Just because it keeps doing so in slices doesn't mean it doesn't add up to one expensive pie. Because lawmakers are simply slapping another one-year Band-Aid on the alternative minimum tax rather than addressing the underlying problem of its growing and unintended impact on middle-class taxpayers, the real five-year budget drain is apt to be bigger.

So let no one be fooled by the rhetoric of fiscal toughness: Rather than reducing the deficit over the next five years, the House proposes to widen it. Listen to Andrew Samwick, President Bush's former chief economist at the Council of Economic Advisers, after the president's speech Monday calling for the cuts on dividends and capital gains rates to be extended. "I find this whole discussion to be disheartening," Mr. Samwick wrote on his Vox Baby blog. "The first order issue with tax policy is that we are not raising enough revenue to match our expenditures. Making the lower tax rates permanent just makes sure that we will permanently not have enough revenue to match our expenditures, unless we decide to lower expenditures by even more."

No one who's watched this president and Congress operate over the past five years, and no one who understands the tidal wave of costs about to hit with the retirement of the baby boomers, believes that expenditures are about to decline. As Mr. Samwick put it, "I would be much happier if the President spoke about which expenditures he will cut . . . with the same specificity that he talks about which tax cuts he'd like to make permanent." Don't hold your breath.

Some of the tax measures -- extending some noncontroversial expiring tax provisions, alleviating the impact of the alternative minimum tax -- make sense. And, yes, tax cuts can help stimulate economic growth; if paid for, lower rates on capital gains and dividends could be beneficial. But if you asked us the best use of $108 billion -- even the best use of $108 billion in tax cuts -- this wouldn't be it. The economy has improved, but not as much for those at the bottom as for those at the top. Why, then, move to extend the cuts on capital gains and dividends, at a cost of $20.6 billion over five years? These provisions don't expire until the end of 2008 in any event, and the benefits flow overwhelmingly to the wealthiest Americans. Nearly half of the benefits of the capital gains and dividend cuts would go to households making more than $1 million annually. It's up to the Senate to resist this tax spending spree.

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