Tax extenders legislation

by Linda Beale
crossposted with Ataxingmatter

tax extenders legislation

As most everyone knows, the Bush tax cuts were passed as temporary measures, with a provision sunsetting the cuts at the end of 2010. Back when the GOP controlled Congress passed the series of Bush tax cuts, they knew that they were creating a whopping deficit but said that deficits don’t matter. They were worried enough about appearances, though, to make the tax cuts temporary and be able to claim lower deficits than if they had been made permanent from the outset. They were quite clear that they planned to make the tax cuts permanent eventually, but they figured that revenue losses of $1.3 trillion or so in the first ten years of the tax cut were about all that they could get by with.

In the meantime, a few things came along that upset the applecart. First, the deregulatory agenda combined with casino banking to create a “perfect storm” financial crisis that quickly mushroomed into a deep recession. In Bush’s last years in office, billions were committed to bailout the financial system and plans were begun to put in place an economic stimulus package to attempt to thwart another depression along the lines not seen since the 1930s. Second, the ongoing wars in Afghanistan and Iraq continue to swallow billions annually. In that context, making the revenue reductions permanent starts to sound like crazy thinking.

Obama campaigned (somewhat foolishly, from my perspective) on retaining the tax cuts for those in the lower four quintiles, but letting the cuts lapse as scheduled for the wealthiest Americans ($250,000 or more in income). The fact is that we have huge revenue demands from the banking crisis/recession and the ongoing wars, and we cannot afford to continue a foolish fiscal policy by extending the tax cuts permanently.

One of the obvious items that should be allowed to lapse is the treatment of dividends as net capital gains subject to the preferential rate. GOP Senators, like Chuck Grassley from Iowa, are arguing that all of the tax cuts must be extended, even for the rich. See Heflin, Senate GOP: Small Businesses Would Suffer if Tax Cuts Expire, July 13, 2010. They claim that we shouldn’t tax the rich, because the rich will put their money into small businesses and that will be good for business: taxing the rich would mean that it would “dry up the funds of small-business owners and make it harder for them to expand their operations.” Id.

They even got Holtz-Eakin–a Republican economist–to argue that we need to extend tax breaks for the wealthy on the old claim that tax cuts foster economic growth. This is like the claim that the estate tax causes the loss of small family farms–it sounds good, is picked up by the media, fits the ideology of the “starve the beast” crowd, but it has the unfortunate attribute of not being true. We have achieved growth more consistently in periods of higher taxes, not vice versa. The “theory” on which the “tax cut equals growth” rests is a mixture of outright buffoonery (the Laffer curve “idea” drawn on a napkin and treated as though it were a scientific hypothesis by the Tax Foundation and Cato Institute types) and irrelevance (the Chicago School economic theory that makes assumptions so far removed from reality that it cannot be considered a reliable instrument for policy considerations).

Update: Rdan..Republican tax nonsense is worth a read and has a great chart.

Of course, the rich will just as likely put any money not paid in taxes in an offshore bank account that they hope to keep hidden from the IRS or in an emerging country market or in stock purchased in the secondary market, which doens’t help small business at all. The only way that anyone helps a business is to put money directly into the business. Most purchases of stock don’t put money in businesses–they are just financial transactions among people who own financial assets, not investments in businesses. This use of “small business” is just a ruse–the right-wing figures that ordinary Americans think small business is a good thing, so they provide a lot of rhetoric about protecting small businesses. But they are really just shilling for the rich, who have enough money to invest in small businesses whether they pay 2001 or 2010 tax rates.