Tax Gimmicks then and now–sunsetting tax cuts; temporary tax hikes
by Linda Beale
When the Republicans wanted to enact huge tax cuts for individuals and businesses in 2001 and 2003 (as well asadditional cuts in other years), they realized that it would result in long-term deficits of unforgiving amounts. So they scaled back their package with a gimmick–a sunsetting tax provision that, like Cinderella’s fairy godmother, caused everything to go back to its former (natural) state on the stroke of midnight–midnight 2010, that is. Thus, they were able to claim that their package of cuts was much less costly than it would be if their plan to make the cuts permanent before 2010 rolled around materialized. It was smoke and mirrors–“we’ll do this and claim our cuts are cheap; once the cuts are enacted, we can accuse anyone opposed to making them permanent of raising taxes and no one will remember it was our gimmick to cover the real cost of the cuts. ”
The gimmick succeeded in many ways.
- First, Barack Obama felt his chances of election were threatened enough by the status quo devotion to the current rates that he promised, in an election that was his to lose, that he would not raise taxes on anyone making less than $250,000 a year. That was nuts, for several reasons. For one, the economic crisis: By the time of the election, we were in the midst of a calamitous crisis brought on by the reckless Reaganomics of deregulation, privatization, militarization and tax cuts, with programs already underway of huge outlays from the federal treasury to compensate for the credit crisis and expectations on every side of a need for a gigantic stimulus package to re-start the economy. For two, the problem of appearing to engage in class warfare. While I think the wealthy should be targeted for much higher taxation after years of preferential treatment for their income, it would have been simpler just to argue for letting the Bush tax cuts die their natural death and then instituting in finely targeted tax cuts that would be much more beneficial to economic growth, along with finely targeted tax increases to do the same (such as elimination of the capital gains preference). Didn’t happen.
- Second, once rates are in place, the right-wing propaganda machine starts churning and repeating a twisted version of reality. Americans aren’t very well trained in economics or finance, and we are too easily swayed by people that come across as genuine–we still buy snake oil from the traveling salesmen. So Beck and Hannity and their ilk have been pedaling the snake oil that letting the Bush cuts lapse is a tax increase, that government is evil and all taxes are theft, that it’s the Democrats who’ve caved to the Wall STreet millionaires (rather than the Bush regime, with its talk of its constituents being the “haves and the have-mores”). So people are primed to think they are overtaxed and get nothing for it.
As a result, there’s a good chance that most of the tax cuts–including the low capital gains rates and treating dividends as capital gains and all the tax breaks for multinationals– will be made permanent, or at least extended from year to year.
Will it work the same for the reverse application of the gimmick? Bill Richardson, governor of New Mexico, is trying to find a way to balance the state’s budget. States are suffering especially now during the crisis, as tax receipts are down at a time when folks are struggling with foreclosures and loss of jobs and need more in social services, not less. Richardson, who will propose a new executive budget to the Legislature on Jan. 19, plans to ask for a temporary $200 million tax increase as part of the means of meeting a $300 million budget gap for fiscal year 2011. The governor isn’t proposing specific tax hikes, but leaving it up to negotiations with the Legislature. Regretably, he has said that he is opposed to increasing capital gains taxes or personal income taxes or decreasing business tax credits and incentives, so he hasn’t left room for much other than the “sin” taxes that tend to be exceedingly regressived or other types of excise taxes (gas production has been mentioned).
Governor’s should remember that what they do now has long term effects. Naming something temporary doesn’t mean it will actually be temporary. States might do well to think about their long-term needs, and whether a change to the way they tax capital gains or a more progressive personal income tax or an addition of a VAT tax might be the best way to increase revenues for now and for the future.
crossposted at ataxingmatter
linda
you are right about this,
but as a country we are doomed. the obvious answer is to raise taxes.. not by much… on the rich. certainly a tax on stock trades of other high end financial transactions would be in order.
but the rich would not like that. and while the poor could vote in the taxes anyway, the poor are not very smart and the rich control the media and the politicians.
another obvious answer is to raise the payroll tax.. not very much… to pay for the benefits that people will need and would have to pay for themselves anyway, unless they want welfare. which the rich will be glad to give them, only to “reform” welfare away as they did under clinton.
or the minimum wage could be raised, and the wages of the poorer in general, then the existing payroll tax would cover the benefits.
but none of this will happen. because politicians have to get elected, and that means they have to do what their stupid constituents think they want.
Depressing. So what you’re saying is that we may end up getting the worst of all possible worlds…creating permanent structural deficits at the federal level matched with temporary tax hikes at the state level. I don’t think you could devise a worse fiscal policy if you tried. Truly astonishing. What we should be doing is further increasing federal deficits by increasing aid to state governments. The tax cuts should be allowed to sunset and then cyclical spending should increase. But to understand why you would actually have to have taken some macro courses somewhere along the line. This morning I was listenting to some leaders from the Texas teabagger movement and it was clear as day that those folks didn’t have a clue about much of anything, and even less about economics. Dumb as posts. But those are the kinds of chuckleheads who are likely to turn out to vote in 2010.
But this does argue for the VAT it is simpler, it taxes that which we used to say we wanted to decrease and does not tax investment. In fact my wild proposal is to abolish the corporate income tax, there by allowing cap gains and dividends to be taxed at ordinary rates by eliminating double taxation. Then pay for the needed additions with a VAT. Since the US taxes its citizens on worldwide income no matter where they live, the chances of people fleeing are much less, in particluar if we add that voluntary expatriation results in a permanent bar to entry to the US thereafter.
One way to check up on people is to cross reference those who register at embassies with the IRS to see if there are matching entries.
Lyle,
The problem with a VAT is that the rate would have to be so high that it would encourage rampant tax avoidance schemes that would make today’s schemes look like child’s play. Since a VAT is against consumption, and since consumption represents about 70% of GDP, and since govt spending represents about 21% of GDP, the VAT tax would have to be something like 21% / 70% = 30%. At that kind of VAT rate merchants and customers would have a very strong incentive to cheat.
The tide seems top be turning against the tax raisers. I’ll be voting for Scott Brown next Tueday. Win or lose the closness or the race shows that Americans are not so hot on making a big move to the left.
We were unlucky as a country the way the presidential primaries and general election came about in 2008. McCain beat Romney in the primary because of his stand on Iraq. And then faced with McCain with his economic team of Joe the Plummer and Tito the builder the country in the face of recession chose Obama. But Obama and his left leaning policies are not what the country needs right now (or ever). We would have been in so much better shape had Romney been the republican nominee and given the choice between Romney or Obama with economics as the main issue it was never even a close call who the better choice would have been. But now were stuck having to play this thing out. Tick tock — times being wasted.
I would leave the personal income tax in place and just abolish the corp. tax. That would allow removing the dividend and capital gains tax. Yes Vats tend to run in the 15 to 20% range. Also bring back the estate tax at 3.5 million exemption, and starting at a 40% rate from there up to 55% at 50 million.
lyle
it would make more sense to abolish the personal income tax and just tax corporations. the corporations would pass the tax through to their customers. we’d all end up paying the same, but the corporation accountants would have to do the tax filing.
Does anybody know what Romney’s policies would have been if he had won? One of his weaknesses is that he was a more or less successful private businessman….or at least he likes to imagine that he was in the private sector. My experience has been that those kinds of folks usually make the mistake of thinking that good private sector business practices make for good govt fiscal policies, which is just wrongheaded.
Didn’t Romney try and cozy up with those goofy Club for Growth idiots? And Sean Hannity supported Romney, so that can’t be good.
Slugs,
Romney was also the governor of Massachusetts. He had the best education and better experience in both the government and private sector than either of the two leading democrats.
I think Romney would have done the financial bailout pretty much the way it was done. He would not have done Obama’s stimulus bill and I think the terms of the GM bailout if he had done one would have been quite different.
Hi Rebecca:
At taxing those >$250,000 at a higher level, we are discussing ~3 million taxpayers with greater disposable incomes http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=2419&topic2ID=40&topic3ID=41&DocTypeID=1. While those making <$500,000 did not see quite the bang for the buck as those >$500,000; they can certainly afford it and their power is far less than the other 144 million taxpayers. Obama just has to open his mouth. Even 95+% of all small businesses make
run
two things
Obama is a young man. He does’t want to spend the rest of his life coaching youth basketball in the Chicago YMCA.
Tax increases on the order of the Clinton tax increases are needed. I think Obama ought to be able to get that just by asking for it. But he is in the Geithner pocket.
I would feel better about folks calling for tax increases on the wealthy if they were willing to pony up just a bit more themselves.
The tide seems to be turning against the tax raisers. I’ll be voting for Scott Brown next Tueday. Win or lose the closness or the race shows that Americans are not so hot on making a big move to the left.
We were unlucky as a country the way the presidential primaries and general election came about in 2008. McCain beat Romney in the primary because of his stand on Iraq. And then faced with McCain with his economic team of Joe the Plummer and Tito the builder the country in the face of recession chose Obama. But Obama and his left leaning policies are not what the country needs right now (or ever). We would have been in so much better shape had Romney been the republican nominee and given the choice between Romney or Obama with economics as the main issue it was never even a close call who the better choice would have been. But now were stuck having to play this thing out. Tick tock — times being wasted.
Linda:
Sorry, I called you Rebecca. Geez . . . almost like “Ground Hog Day.” I am embarassed.
coberly:
Integrity, that is what Obama sold to us . . . integrity.
Cantab,
You might want to leave grand pronouncements about the direct the world is taking and the wider implications of individual events to people who, well, people who aren’t you. Everybody here knows you have an ax to grind. Your choice to vote for any particular individual really doesn’t tell us whether the tide is turning for anybody.
Why we should take your declarations about what the country needs seriously is also not obvious. On what do you base your conclusions? Other than personal bias?
The problem with eliminating corporate taxes is that – contrary to the self-serving claims of corporate apologists that the entire tax is passed on to consumers – some part of the tax comes out of investor-class incomes. The investor class overlaps pretty extensively with the rich, who have benefited disproportianately from Bush tax cuts. Meanwhile, income at the high end has grown much faster than in come in the middle and at the low end. If we are going to make big changes to the US tax system, it should not start out by cutting taxes on those already advantaged by the system, at the expense of taxes on the necessities that make up the bulk of spending among the already disadvantaged.
Indeed. 🙂
And think of the overall savings from not having ordinary citizens do their taxes and try to figure out how or hire others to do them. And the savings from not having tax consultants figure out how to game the system. And the savings from Congress and the lobbyist not having to devise loopholes, although the slack might be quickly taken up by devising corporate loopholes. The GDP might go down, with the loss of all that unproductive work, but there would still be a net benefit.
Kharris,
On what do you base your conclusions? Other than personal bias?
Polls, the outcomes of the recent races in Virginia, and New Jersey, and the closeness of the race in Massachuetts. In terms of scenario planning where you make alternative stories about a possible futures I take these events as signposts the country does not want to move left, is not satisified with the democrats economic initiatives, and is pivoting to reverse the political compostion in Washington and at the State Level.
Coberly,
I would feel better about folks calling for tax increases on the wealthy if they were willing to pony up just a bit more themselves.
Another 20 cents per week?
sad to say
all the polls prove is the success of the Republican propaganda machine.
having the mob lurch from left to right, or from right to left, doesn’t prove a damn thing about the right way to steer the ship.
harris
i suspect the reason the corps don’t want corp taxes… aside from the knee jerk insight that cutting taxes saves you money at least in the short run.. is that when they get around to passing the costs through to their customers they find the customers shopping a bit more carefully and the least efficient corporations lose customers. you see capitalism is only “the most efficient way to allocate resources” if you get a tax break.
yep.
Corporations can offshore themselves to avoid US taxes US citizens and permant residents can not short of renouncing citizenship. By abolishing the corp tax then taxpayers could not flee the juristiction. Note that the rich would have a major tax increase as there would be no dividend or capital gains rate relief it would be taxed at the same rate as wage income, solving the problem pointed out by Warren Buffet that he pays a lower rate than his secretary. One might say a corporation would just sit on money it has, but doesn’t that raise the value of the company? Today the big money is spent on corporate loopholes and lobbying for that more than on the individual side, except where a corp lobbies for a consumer break because more money will come its way if the break exists.
well, hell, if the corps offshore themselves, that’s what a protective tarrif is for. these are not smoot-hawley days.
Tax Gimmick – http://www.cnn.com/2010/POLITICS/01/14/health.care.negotiations/
I’d risk $100,000 to your 1 penny that in a year and a half if this bill is law of the land, union leaders will be begging for a 2-year extension. This will be a nice way to overstate revenues of the plan by including a Cadillac tax that will NEVER hit union healthcare plans.
I take back NEVER. Once the democrats piss away all their political capital and we have the other evil party back in power, this blatently unconstitutional clause will get canned when its time is up. Of course maybe the whole bill will get pitched. Try running a reegression on government’s share of healthcare spending versus % of GDP spent on healthcare. The best part is to extrapolate the line of best fit.
I should have read more before making the first post, because this is equally as awful…
State and local government healthcare plans are exmpt.
http://thehill.com/homenews/administration/76085-white-house-and-dem-leaders-give-concessions-to-win-labors-support
I keep calling you leftwing loonies because you never once come out against the corruptness of the democrats. Calling out the senator from Nebraska for cutting the Medicare deal for the state is not implicit approval for the republicans that you have such disdain for (unless you live in a dichotomous world).
I bet Brucy will be happy to hear his healthcare benefits are being protected from taxation(theft).
Yawn . . .
Please say something substantial so we can have something to respond to other than ad hominems. Arguing fact or reason a difficulty for you?
“Arguing fact or reason a difficulty for you?”
Yawn…
Please say something substantional so we can have something to respond to other than ad hominens.
jAY,
Read Yves Smith CONCERNS.