Tax Cuts, Again

Thursday, May 11, 2006

LAWMAKERS are about to pass a five-year, $70 billion tax cut, to be followed shortly by a "trailer" measure containing $20 billion or so more -- who knows how large once Congress finishes larding it up? The House approved the $70 billion measure yesterday; the Senate is expected to take it up today, and no one is holding out much hope of stopping it. Budgetary dishonesty, distributional unfairness, fiscal irresponsibility -- by now the words are so familiar, it can be hard to appreciate how damaging this fiscal course will be.

To stuff the tax cuts into a $70 billion package, lawmakers used a gimmick that not only disguises the true cost of the tax cuts but also ends up, down the road, dramatically increasing it. A change in retirement savings rules would allow upper-income taxpayers to convert their ordinary individual retirement accounts into what are called Roth IRAs, in which savings are taxed at the time of deposit but can then grow tax-free. This would bring in money in the short run ($6.4 billion over the next 10 years) but cost billions more in the long term. Indeed, because the legislation doesn't specify that the converted accounts already exist, the change appears to be a backdoor lifting of all income limits for Roth IRA contributions for those clever enough -- or with clever enough accountants -- to exploit the loophole.

This is what passes for fairness in Washington these days: a big windfall for the wealthy to "pay for" -- at least in the skewed reality of Washington budgeting -- another tax cut for the wealthy. Middle-income households would receive an average tax cut of $20, while the 0.2 percent of households with incomes over $1 million would get average tax cuts of $42,000, according to preliminary estimates by the Urban Institute-Brookings Institution Tax Policy Center. Nearly half of the benefits from extending the cuts on capital gains and dividend income would go to households with incomes of more than $1 million.

You'll hear the administration and its allies crowing that a recent surge in tax revenue proves that the Bush tax cuts are "working." Capital gains cuts aren't a particularly effective way to stimulate the economy, and while the rise in the stock market coincided with the passage of the cuts in 2003, the evidence of a causal link is weak. In fact, tax revenue (and the stock market) did pretty well in the 1990s, too, with a more responsible fiscal policy. And to the extent that lower taxes on capital gains and dividends have a positive effect on long-term investment and growth, that has to be counterbalanced against the drag on the economy from higher deficits. These tax cuts don't magically pay for themselves. This Congress and administration are putting the nation deeper and deeper in debt to benefit a sliver of the population that doesn't need the help. Someone's going to have to pay for these deficit-financed tax cuts eventually, and it's likely to be your grandchildren.

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