Suitably Flip

Carving Up the Tax Cut

Bulldog Pundit has some excellent commentary on today's New York Times piece looking at how the next round of tax cuts will be divvied up.

In short, there are two conflicting plans, each calling for cuts of roughly $60 billion.  One, being promoted by the President and House Republicans, would extend Bush's earlier tax cuts on stock dividends and capital gains.  The other, slightly smaller reduction plan, embraced by Senate Republicans, allows the dividend and gains cuts to expire in 2008 and imposes what amounts to a $5 billion fine for oil companies (assessed via a change in the accounting rules discussed earlier here).  The Senate plan instead directs the cuts toward putting the brakes on the Alternative Minimum Tax, an outdated system that sought to capture wealthy, aggressively deducting taxpayers, but now results in higher taxes for millions of middle-class Americans.

While both plans are orders of magnitude too modest, the thrusts of each are laudable.  Stock dividend taxes represent a double-taxation scheme which is not only unfair, it discourages investment and therefore growth.  The AMT was at its best a band-aid solution to the exploitation of loopholes caused by the system's own lamentable complexity.  In its current iteration, it's nothing more than an entrenched way to soak a huge cross-section of taxpayers for extra revenue.  True tax reform would see a swift end to both.

However, if we accept the political reality that only one will be going through this round, which is more appropriate?

In my book, the proper test would be:  Which plan better encourages long-term sustainable growth?  Here, it seems clear the House/Bush plan wins out.  Encouraging growth by enhancing the returns on equity investments is not only good for individual investors and businesses that can put that invested capital to productive use, but it also directly promotes real economic growth, the tide that truly lifts all boats.

The Senate plan, on the other hand, while commendable for seeking to roll back the AMT provision, has less compelling secondary effects (and the plan's watered down alternative to the Democrat-proposed "windfall profits tax" on oil companies is downright anti-growth).  The number of people that would be immediately impacted by the Senate plan is admittedly greater and the day one impact would be felt by a wider economic swathe.  That being the case, the cynic in me wonders if, given the plan's comparatively modest economic attractiveness, it may be more palatable to Senators with looming re-election campaigns to consider.

The President of course no longer has to worry about his own electoral lot.  At this point, issues of legacy step in to cloud dispassionate analysis where re-election concerns once muddled.  Preserving his hard-won tax cuts would certainly be a legacy-ensconcing move.  And happily, in this case it's a move well-aligned with reasoned fiscal policy, given the implications of secondary economic effects discussed above.  Still, Bush would do well to consider the secondary political effects of this process as well.  Certainly, the Senate plan needs to come a long way toward the House/Bush plan.  But an all-out victory at the expense of a few Senators' re-electability could contribute to a shift in the party balance in the Upper House a year from now.

Bush has the opportunity to see a legacy take shape, not only as his policies bear fruit, but also as a two-house majority continues to fight for the pro-growth reform which budded during his administration.

However the two plans wind up reconciling, they represent a move in the right direction, one which will hopefully not be overshadowed by party infighting (and hopefully, the tax cuts centrally embraced by each plan will eventually be implemented, as they are both in the country's best interest).  That said, the long-term economic impact of the House/Bush plan is farther reaching and, should good economic sense prevail, this plan will be recognized as a higher priority.

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Carving Up the Tax Cut

Bulldog Pundit has some excellent commentary on today's New York Times piece looking at how the next round of tax cuts will be divvied up.

In short, there are two conflicting plans, each calling for cuts of roughly $60 billion.  One, being promoted by the President and House Republicans, would extend Bush's earlier tax cuts on stock dividends and capital gains.  The other, slightly smaller reduction plan, embraced by Senate Republicans, allows the dividend and gains cuts to expire in 2008 and imposes what amounts to a $5 billion fine for oil companies (assessed via a change in the accounting rules discussed earlier here).  The Senate plan instead directs the cuts toward putting the brakes on the Alternative Minimum Tax, an outdated system that sought to capture wealthy, aggressively deducting taxpayers, but now results in higher taxes for millions of middle-class Americans.

While both plans are orders of magnitude too modest, the thrusts of each are laudable.  Stock dividend taxes represent a double-taxation scheme which is not only unfair, it discourages investment and therefore growth.  The AMT was at its best a band-aid solution to the exploitation of loopholes caused by the system's own lamentable complexity.  In its current iteration, it's nothing more than an entrenched way to soak a huge cross-section of taxpayers for extra revenue.  True tax reform would see a swift end to both.

However, if we accept the political reality that only one will be going through this round, which is more appropriate?

In my book, the proper test would be:  Which plan better encourages long-term sustainable growth?  Here, it seems clear the House/Bush plan wins out.  Encouraging growth by enhancing the returns on equity investments is not only good for individual investors and businesses that can put that invested capital to productive use, but it also directly promotes real economic growth, the tide that truly lifts all boats.

The Senate plan, on the other hand, while commendable for seeking to roll back the AMT provision, has less compelling secondary effects (and the plan's watered down alternative to the Democrat-proposed "windfall profits tax" on oil companies is downright anti-growth).  The number of people that would be immediately impacted by the Senate plan is admittedly greater and the day one impact would be felt by a wider economic swathe.  That being the case, the cynic in me wonders if, given the plan's comparatively modest economic attractiveness, it may be more palatable to Senators with looming re-election campaigns to consider.

The President of course no longer has to worry about his own electoral lot.  At this point, issues of legacy step in to cloud dispassionate analysis where re-election concerns once muddled.  Preserving his hard-won tax cuts would certainly be a legacy-ensconcing move.  And happily, in this case it's a move well-aligned with reasoned fiscal policy, given the implications of secondary economic effects discussed above.  Still, Bush would do well to consider the secondary political effects of this process as well.  Certainly, the Senate plan needs to come a long way toward the House/Bush plan.  But an all-out victory at the expense of a few Senators' re-electability could contribute to a shift in the party balance in the Upper House a year from now.

Bush has the opportunity to see a legacy take shape, not only as his policies bear fruit, but also as a two-house majority continues to fight for the pro-growth reform which budded during his administration.

However the two plans wind up reconciling, they represent a move in the right direction, one which will hopefully not be overshadowed by party infighting (and hopefully, the tax cuts centrally embraced by each plan will eventually be implemented, as they are both in the country's best interest).  That said, the long-term economic impact of the House/Bush plan is farther reaching and, should good economic sense prevail, this plan will be recognized as a higher priority.