Suitably Flip

Speaking of Taxes

As the Senate kindly passed the Tax Relief Extension Reconciliation Act of 2005 66-31 yesterday, it's time once again to revisit the topic of which tax cut plan is better: the Senate's or the House/White House's.

As I've argued before (and before that), the answer is the House/White House plan.

The Senate plan has grown since it was first drafted last fall (from under $60 billion to around $70 billion), which is nice.  But it still focuses on the wrong priorities.  Don't get me wrong, the aim is laudable, namely to dramatically curtail the increasingly voracious Alternative Minimum Tax, which ensnares 15 million American households (and more each year) into higher tax bills.

The House/White House plan would extend the dividend and capital gains tax cuts which have done such wondrous things for our economy (see previous post).

Both are worthy and wonderful things to do.  Both are necessary steps toward sensible tax reform.  Both would fuel growth, support businesses large and small, create jobs, encourage investment, boost incomes, expand the tax base, and raise standards of living.

The key difference is the degree to which the measures fuel growth (and the other growthy components like creating jobs and encouraging invesmtent).  Extending the tax breaks on dividends and capital gains has a beautiful multiplier effect which, in addition to returning money to taxpayers, enables the American economy to run less frictionally, rewarding value creation rather than strangling it in order to shore up government coffers in the short term.

Dialing back the AMT is worthwhile, but it doesn't have this same special effect to nearly the same degree.  When Democrats talk about the "cost" of a tax cut, it's usually bunk, because the growth effects of tax cuts will often pay for their "costs" and then some.  But in this case, the AMT plan would indeed be "costlier" (if we must use such flawed terminology) than a tax plan of identical magnitude involving breaks on dividend and capital gains taxes.

There's a reconciliation process to be undertaken now that both houses' plans have been passed.  When all is said and done, we'll likely wind up somewhere in the middle, with a tax cut of roughly $70 billion, some allocated to an AMT rollback and some to investment income tax breaks.  The further the Senate can be pulled over to the House side in this fiscal tug-of-war, the better.

(The Senate plan also continues to contain that accounting piffle special tax on oil companies, which was a mealy-mouthed bow to the "windfall profit tax" stumpers, an idea which, as I've noted a time or two or three, is unspeakably puerile.  Happily, Senator Chuck Grassley, Senate Finance Committee Chairman, has acknowledged that this measure is unlikely to survive reconciliation.)

Another feather in the cap of the House/White House plan is the fact that senior citizens, that stratum of society that we're getting increasingly worried about supporting as the baby boomers retire, stand to benefit disproportionately from an extension of the dividend and capital gains tax cuts.

Two reports by the Tax Foundation (this one and that one) show that reliance on investment income tends to increase with age and that a majority of taxpaying senior citizens rely on dividend income.

I do hope we're able to nix or dramatically roll back the AMT at some point, but given the political reality that the minority will only tolerate so much pro-growth legislation at one time, extending the investment income tax cuts (not to mention steering clear of fining companies for making money) should be given priority.

Tax cuts are always great.  But some are even greater than others.

 

Previously:

Carving Up the Tax Bill
Tax Bill Passes Senate, Possibly Muster
Let's Break Windfall Taxes
A Supremely Horrible Idea

Comments

Speaking of Taxes

As the Senate kindly passed the Tax Relief Extension Reconciliation Act of 2005 66-31 yesterday, it's time once again to revisit the topic of which tax cut plan is better: the Senate's or the House/White House's.

As I've argued before (and before that), the answer is the House/White House plan.

The Senate plan has grown since it was first drafted last fall (from under $60 billion to around $70 billion), which is nice.  But it still focuses on the wrong priorities.  Don't get me wrong, the aim is laudable, namely to dramatically curtail the increasingly voracious Alternative Minimum Tax, which ensnares 15 million American households (and more each year) into higher tax bills.

The House/White House plan would extend the dividend and capital gains tax cuts which have done such wondrous things for our economy (see previous post).

Both are worthy and wonderful things to do.  Both are necessary steps toward sensible tax reform.  Both would fuel growth, support businesses large and small, create jobs, encourage investment, boost incomes, expand the tax base, and raise standards of living.

The key difference is the degree to which the measures fuel growth (and the other growthy components like creating jobs and encouraging invesmtent).  Extending the tax breaks on dividends and capital gains has a beautiful multiplier effect which, in addition to returning money to taxpayers, enables the American economy to run less frictionally, rewarding value creation rather than strangling it in order to shore up government coffers in the short term.

Dialing back the AMT is worthwhile, but it doesn't have this same special effect to nearly the same degree.  When Democrats talk about the "cost" of a tax cut, it's usually bunk, because the growth effects of tax cuts will often pay for their "costs" and then some.  But in this case, the AMT plan would indeed be "costlier" (if we must use such flawed terminology) than a tax plan of identical magnitude involving breaks on dividend and capital gains taxes.

There's a reconciliation process to be undertaken now that both houses' plans have been passed.  When all is said and done, we'll likely wind up somewhere in the middle, with a tax cut of roughly $70 billion, some allocated to an AMT rollback and some to investment income tax breaks.  The further the Senate can be pulled over to the House side in this fiscal tug-of-war, the better.

(The Senate plan also continues to contain that accounting piffle special tax on oil companies, which was a mealy-mouthed bow to the "windfall profit tax" stumpers, an idea which, as I've noted a time or two or three, is unspeakably puerile.  Happily, Senator Chuck Grassley, Senate Finance Committee Chairman, has acknowledged that this measure is unlikely to survive reconciliation.)

Another feather in the cap of the House/White House plan is the fact that senior citizens, that stratum of society that we're getting increasingly worried about supporting as the baby boomers retire, stand to benefit disproportionately from an extension of the dividend and capital gains tax cuts.

Two reports by the Tax Foundation (this one and that one) show that reliance on investment income tends to increase with age and that a majority of taxpaying senior citizens rely on dividend income.

I do hope we're able to nix or dramatically roll back the AMT at some point, but given the political reality that the minority will only tolerate so much pro-growth legislation at one time, extending the investment income tax cuts (not to mention steering clear of fining companies for making money) should be given priority.

Tax cuts are always great.  But some are even greater than others.

 

Previously:

Carving Up the Tax Bill
Tax Bill Passes Senate, Possibly Muster
Let's Break Windfall Taxes
A Supremely Horrible Idea