Dealing with the Sunset of the Bush Tax Cuts (Part V in a series)–dividends at capital gains rate

by Linda Beale
crossposted with Ataxingmatter

Dealing with the Sunset of the Bush Tax Cuts (Part V in a series)–dividends at capital gains rate

IN this series, i’ve been discussing the merits of enacting a new series of tax cuts that mimic, at least in part, the Bush temporary tax cut legislation that expires at the end of this year.

The primary arguments for the original Bush temporary tax cuts were either bogus to start with or proven weak over the period of the tax cuts.

1.The Republicans who pushed the cuts claimed first that they were intended to return to taxpayers the surplus. Of course, that argument was laughable from the beginning: Bush deficits started in the first year of the Bush regime and got worse for the long term as the costs of a military budget pumped up by preemptive war and other augmenting of government spending at the same time that tax revenues were cut again and again throughout the regime.

2.Various Republicans also admitted that their goal was to cut the size of government–though they didn’t mean the military and they did mean any programs that protect average Americans (such as Social Security, unemployment compensation, environmental programs, OSHA, etc.). But the size of government grew in spite of the reductions in revenue, resulting in expanding deficits.

3.The various expensing provisions; repatriation with almost no taxation (in the 2004 “American Jobs Creation Act”); tax breaks for oil and other natural resource companies; international tax breaks; and other corporate-favorable provisions were supposed to stimulate entrepreneurial activity and job creation. Instead, businesses used the low-tax repatriated income to pay managers more and workers less, and laid off workers at the same time. The expensing provisions allowed corporations tax breaks for equipment they would have bought anyway, but didn’t create new jobs–the Bush regime’s jobs record was terrible, barely keeping up with inflation and certainly not spurring new job growth. The tax breaks for natural resource companies fed their complacency about everything from jobs to safety to environmental protection–giving companies more for less doesn’t create better citizens and doesn’t get us cheaper energy either. The record from the tax cuts as far as entrepreneurialism and job creation was dismal–the mainstream neoconservative and neoliberal theories of market fundamentalism didn’t work out as claimed.

4.The lowering of capital gains taxation and the taxation of dividend as a net capital gain at the lower rate were also heralded as ways to spur investment in new businesses (entrepreneurialism) and job creation. Bullshit. Most of the result was just more money in the pocket of the richest Americans who own most of the financial assets, and that money in the pocket was as likely to be invested in offshore bank accounts as put to work supporting a new business here in the US. The dividend tax cut didn’t even lead to much in the way of dividend payouts–except perhaps for firms whose managers and directors saw a chance to benefit themselves. Even if those expiring tax cuts are not renewed with new tax legislation, it is not likely to have much of an effect on companies’ dividend policies. See Higher Taxes May Not Push Firms to Cut Dividends, Wall St. J., Aug. 30, 2010.

5.The cuts in individual rates were supposed to provide more money as an economic stimulus. But the Republicans who passed those rate cuts knew that the AMT would act as a clawback to the cuts over time, except for those at the very top who were always subject to the AMT and those in the bottom who are hardly ever subject to the AMT. And they knew that amending the AMT to conform to the temporary tax cuts would be tremendously expensive–at least a trillion in revenue lost for the decade of the tax cuts, where the “temporary” nature of the bill had been necessary to claim that the cost was “just” 1.3 trillion over a decade. In other words, the tax cut bills passed during the Bush regime with the 2010 sunsetting gimmick were a sham from the beginning–they cost much more than those who passed them wanted to admit, and they carried with them a clawback mechanism that would undo the cuts in rates for many individuals. The various annual “patches” to the AMT are extraordinarily costly in terms of lost tax revenues since they are essentially an extension of the tax cuts to an even broader base, and the corporate changes to the AMT have reduced its effectiveness in cutting back on corporate preferences while costing the fisc billions.

6.The estate tax scaleback and one-year repeal was the most gimmicking of all. Cutting the budget by $30 billion a year in order to fund a giveaway to the wealthiest and most privileged Americans is hard to justify in any budgetary climate. So Republicans pushing estate tax repeal and the various “coalitions” funded by wealthy families like the Walton heirs have painted a facade of “helping little guy farmers and businesses” on their efforts–a facade that many Americans may have bought hook, line, and sinker since they do not tell the truth, much less the whole story. Very few family farms and very few small businesses are threatened at all by the estate tax.

So what should this list of bogus and failed reasoning tell us about what the Congress should do on taxes for 2011 and thereafter?

1.I say let the Bush cuts expire according to the way they were written. But enact a new set of tax cuts that are better targeted to jumpstart the economy and to put money where it is needed.

2.Let the corporate giveaways expire as slated.

3.Let the estate tax mess expire as slated. Enact a new estate tax law that (i) increases the exemption amount to a reasonable level (say, $2 million) and indexes it for inflation and (ii) enacts a progressive rate structure (ranging from 55% on the estate that exceeds the exemption amount, up to some higher rate of 65% or 70% on multi-billion-dollar estates.

4.Let the capital gains changes die as slated, and do not enact any further capital gains preferences (so dividends would go back to being treated as ordinary income).

5.Let the individual rate changes die as slated, and enact a new tax cut for individuals making $100,000 or less, with a temporary tax cut for individuals making up to $200,000 for a three year period to aid us in getting out of this recession.

6.Enact genuine AMT reform–in which capital gains are treated as a preference and which provides a significant exemption amount based on gross income. See the earlier articles (2005-2006) in ataxingmatter on AMT reform for more specifics about the kinds of reforms to the AMT that make sense.

7.In conntection with the rate cut and AMT legislation, enact measures to pay for the tax cut, including
(i) a carried interest provision taxing all profits interests as ordinary income
(ii) a corporate tax provision limiting the benefits of tax-free reorganizations and consolidations, and
(iii) a charitable contribution provision eliminating the deduction of value in excess of basis.