Relevant and even prescient commentary on news, politics and the economy.

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

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War taxes?

by Linda Beale
(cross posted at ataxingmatter)

One can question the timing of implementation, but can one argue against the financing? …Rdan

War taxes?

Since Bush invaded Afghanistan in 2001 (and then, Iraq), we have been paying for war as an afterthought. In the Bush era attempt to treat war as something that happened “over there” and didn’t disrupt the credit-fed consumer binging happening “over here,” there were no pics, no war bonds, and certainly no war taxes to pay for it. Instead, we actually cut taxes year after year after year, reducing government revenues at a time when we were passing supplemental appropriations year after year after year to pay for the war. With reduced taxes and increased military spending, that meant we borrowed to pay for the war of choice that Bush led us into.

In most wars, this country’s citizens and leaders have been somewhat wiser on the fiscal score. In the past, we generally raised taxes to pay for the huge expenditures that war necessitates–for caring for soldiers overseas and after they come home, for tanks and trucks and planes and drones and all the guns and missiles, not to mention warships and fuel, the construction of bases and building of roads and provision of power and all the other expenses of going to war (including, increasingly under Bush, the privatization of the military and the much higher costs of contracted mercenaries compared to Army soldiers and of Halliburton cafeterias that, in quite a few cases, didn’t serve the food they charged the US for).

Now that Bush and much of the Bush Congress are gone from office, it’s time to look at the costs of war when we think about what our tax burden should be. As one writer notes:

[O]ne thing literally everyone agrees Vietnam showed, from flaiming liberals to fire-breathing neocons, is that it’s a very bad idea to get involved in a long, grueling, expensive war without explaining to the American people how much they will have to sacrifice, and securing their support.” The Economist, David Obey’s war tax (Nov. 27, 2009).

David Obey, chair of the House Appropriations Committee, introduced on Nov. 19–with 10 Dems as co-sponsors–the “Share the Sacrifice Act of 2010” to do just. See Pincus, If It is to be fought, it ought to be paid for, Wash. Post, Dec. 1, 2009. How? by adding a graduated surtax, in 2011, to the income tax for those earning more than $30,000 a year. The rate would be 1% on incomes up to $150,000 and more above that–generally, a few hundred dollars, with the rate on higher incomes set to generate enough revenues to pay for the prior year’s cost of being at war, with returning GIs and families of those killed in combat exempt. And the surtax could be delayed (from 2011 to 2012) if the economy is weak.

The article notes an irony that has been mentioned also in the context of the health care reform debate about paying for government action. IN health care, many of those (especially republicans) who argue that “oh no, we can’t do this to fix the health care system, it costs too much and will create deficits” are the same ones who supported the series of Bush tax cuts that led to huge deficits, and their argument was “deficits don’t matter.” In the war tax debate, many of those most eager for further commitment to Afghanistan are unwilling to support taxes to pay for the conflict rather than living on borrowed money. (Or, they’d probably be willing to cut various “entitlements” for the vulnerable amongst us, even while extending even more “entitlements” to corporate taxpayers those who own significant financial assets in the way of further tax cuts.) Note the article quotes Lindsey Graham as saying spending has been out of control “since the administration came into power.” Funny–the spending that has happened was necessitated by the economic mess left by the Bush Administration, that fought wars and INCREASED SPENDING while cutting taxes. Was it spending out of control? or was it spending while going on a multi-year tax cut binge that was out of control? I’d say the latter.

If you want the right’s take on this, read Amy Ridenour–a self-admitted Rush Limbaugh enthusiast. She thinks Rush’s “logic” is fine. By the way, his argument translates to: we’re in debt [implying it’s all Obama’s fault and not because of the Bush screwups of the economy and the huge amount of borrowing already committed under Bush] so this argument about paying for the war is silly when we already have so much debt; and/or yeah, well, just cut the spending on all those silly programs that progressives have put in place since Roosevelt (Rush calls it the “Fair Deal, New Deal, Rotten Deal, Raw Deal and Great Society”)–ie, the programs (subtracting out Rush’s trash talk) that we as a people have decided over many decades to use to support the vulnerable and improve opportunities for decent living standards for all. And like many right-wingers, Ms. Ridenour claims that her goal is supporting “principles of a free market, individual liberty and personal responsibility, combined with a commitment to a strong national defense.” Amy, how do not paying for the wars we CHOOSE to wage add up to either “personal responsibility” or “commitment to a strong national defense” or even “free market”–since there is no such thing as a “free” market without the stability, institutional structure, and legal forms provided by a stable and functioning government?

At any rate, mainstream commentators seem to think the bill wouldn’t pass, which means that they seem to think that it won’t get substantial Republican support, which the Rush-Ridenour excerpt surely suggests is correct. See David Obey’s war tax, Economist (Nov. 27, 2009). Those very people who are gung ho for war (“commitment to strong national defense”) and gung ho for not having deficits aren’t likely, that is, to vote to pay for the war in which they are so gung ho for others to fight. As the Economist article hints, how better to support the troops than paying for their fight?

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