Taxes & Spending

A Right, Left Punch On The Tax Front?

The Senate was expected this week to pass the tax cut extension deal negotiated by the White House and Republican leaders that has divided both parties in Congress, including conservatives.
    
In a showdown fight in the last weeks of the Democratic-run, lame-duck Congress, Senate lawmakers will vote on a plan to continue all of President George W. Bush’s tax cuts for every income bracket for two more years, including lower dividend and capital gain tax rates, a one-year, 2 percent payroll tax cut for all workers and a 35 percent death tax for two years, instead of 55 percent rate if no agreement is reached.
    
The surprisingly large temporary recovery package agreed to by President Obama that contains the centerpiece tax cut proposals of the GOP’s 2010 campaign agenda was unthinkable a month ago. But the White House faces a disastrous situation in which income taxes will rise for all Americans if Bush’s tax cuts are allowed to expire on Jan. 1. That could tip a weak economy into another recession and worsen a staggering 17 percent underemployment rate.
    
Liberal House Democrats have already denounced the deal that they call a betrayal of Obama’s campaign pledge to raise taxes on Americans and small business earning more than $250,000, as well as on capital gains and dividends. It was unclear how much GOP support the deal had, though two influential conservatives, Reps. Jeb Hensarling of Texas and Michele Bachmann of Minnesota, have suggested that many Republicans could vote to reject the tax cut extension plan.
   
But as this is written, Senate passage appeared likely, despite the bitter opposition from liberal Democrats like socialist Bernie Sanders of Vermont. House Democratic caucus chairman Chris Van Hollen said Democrats strongly opposed the lower rate on estate taxes, but said the House would not block the package deal.
    
Still, an unknown number of Senate conservatives led by South Carolina Sen. Jim DeMint were opposing it because of the plan’s 13-month extension of unemployment benefits without any offsetting spending cuts to pay for its $57 billion cost — though that wasn’t his only objection. “It raises taxes, it raises the death tax,” he said,” he said.
     
It was likely that an amendment would be offered by someone on the Republican side, perhaps by DeMint, to make offsetting budget cuts. But even if it did not pass at this time, was that reason enough to kill more than $800 billion in tax cuts long supported by conservative Republicans, economists and the entire business community?
    
Within a few weeks, Republicans will take control of the House, and with it the powerful appropriations committee where they plan to make sizable cuts in spending.
    
The U.S. Chamber of Commerce, which has opposed Obama’s big spending, tax hike agenda since his first day in office, cheered the tax rate extension deal as a big victory for struggling businesses. “We are very pleased that lawmakers of both parties were able to work together to provide a bipartisan path to prevent one of the largest tax increases in American history,” said the chamber’s chief lobbyist, Bruce Josten.
    
Support for the plan also came from the National Association of Manufacturers, particularly for the 100 percent write-off of new business equipment, and from the National Federation of Independent Business — whose small business members would have been crushed by a 40 percent income tax rate if Obama had succeeded in letting the top Bush tax rates expire.
    
Daniel J. Mitchell, the Cato Institute’s chief economist, saw much to like in the deal, though in his analysis, “The Good, the Bad, and the Ugly of the Tax Deal,” he said it had its faults, too: These faults included failure to offset the costs of the jobless benefits, make the tax cuts permanent and eliminate the death tax entirely. Though he thinks the lower estate tax rate for two years is “Another bit of good news.”
    
Still, “Compared to what I expected to happen, the deal … is pretty good,” he said. The two-year extension of the tax cuts, “including the lower rates on dividends and capital gains … is good news for investors, entrepreneurs, [and] small business owners … who were targeted by Obama.”
    
Also good: Obama’s “gimmicky and ineffective make-work-pay tax credit” will be replaced by a  2 percentage point cut in the payroll tax which “improves incentives to work” though he doubts it will have “much positive effect on the economy” since it lasts only one year. A payroll tax cut on employers would have a much bigger job creation impact.
      
Policy scholars at the Heritage Foundation found similar things to like and dislike in the tax package. Economic analyst Bill Beach says the two-year tax cut extension is a welcome “reprieve” that will give a much more conservative House and Senate time to make needed pro-growth changes by 2012.
   
Like what? “I’d like to see a reformed [tax] system that emphasizes low rates but broadens the base,” Glenn Hubbard, Bush’s chairman of the Council of Economic Advisers, told The Washington Post last week.
    
This idea, a major fiscal proposal by the president’s deficit-cutting commission, would simplify the tax code by ending special interest loopholes and corporate welfare, cutting the top income tax rate to 28 percent. It has broad bipartisan appeal, too, from a liberal like President Obama to a conservative tax-cutter like Oklahoma Sen. Tom Coburn.

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