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The Tax Showdown

A fight Republicans can win.

Sep 20, 2010, Vol. 16, No. 01 • By MATTHEW CONTINETTI
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Congress returns to Washington this week, just in time for a fight over the future of the 2001 and 2003 tax cuts. Those cuts are scheduled to expire on January 1, leading to increased taxes on estates, dividends, capital gains, and incomes. President Obama wants to maintain current tax rates for households making under $250,000 a year, while Republicans (and more than a few Democrats) want to extend current tax rates for everybody, at least through 2012. Pop quiz: Which plan makes the most economic and political sense?

The Tax Showdown

The answer is  .  .  .  extending current tax rates for another two years. We can’t think of a worse time to increase taxes. Private-sector job creation is tepid. Companies are hoarding cash. The economy may be on the brink of a double-dip recession. In this economic climate, any sort of tax increase is a bad idea. Even Obama acknowledges that low taxes bolster incentives to work and invest and hire. Why else would he support measures like making permanent the research and development tax credit and allowing full depreciation for business investment in 2011?

Obama says he’s against extending tax rates for the “wealthiest 2 percent of Americans” because the country can’t afford the lost revenue. That’s rich. A two-year extension isn’t permanent, and even a 10-year extension would add no more to the deficit than the president’s stimulus bill added in a single year. Excuse us if we decline to take lessons on fiscal responsibility from a man who’s presided over by far the largest deficits in postwar American history and whose budgets forecast red ink as far as the eye can see. If Obama were so very serious about fiscal austerity, he’d be against extending all of the 2001 and 2003 tax cuts, not just those cuts that affect the rich.

Obama says that keeping taxes low for households making more than $250,000 a year wouldn’t have a positive effect, because such households are filled with “folks who are less likely to spend the money.” This is Obamanomics 101, in which economic activity is driven by spending at the lower end of the income distribution. The best tax cuts, in this view, give poor people additional money to spend on consumer goods, thereby increasing aggregate demand. It’s an attractive idea, especially to liberals, but it’s also been tried and failed. According to Recovery.gov, the stimulus bill contained about $288 billion in “tax cuts”—actually rebates in payroll taxes spread over several months—for “millions of working families and businesses.”

What the working families and businesses did with the extra dough is well known. They pocketed it. They used the money to pay down debt. They hedged against future uncertainty. So, even if you accept the president’s logic, the fact is consumers won’t start spending enough until they are confident about the future. And they won’t be confident about the future until they see government policies that are predictable, consistent, and in line with the entrepreneurial, high-risk spirit of America. Policies which are not forthcoming from the Obama White House.

The president also said last week that households making more than $250,000 don’t deserve a tax extension, because “these are just about the only folks who saw their incomes rise when Republicans were in charge.” It’s a situation Obama wants to rectify, regardless of the consequences. He’s more committed to a particular theory of social justice than he is to growth and full employment. He’s spent his presidency redistributing money from those at the top—and from those who haven’t been born—to others below.

The stimulus borrowed from the future to pay for today’s education, health, and welfare. The Obama budget flatlines defense, while social spending continues to increase. The health care bill imposes taxes, fees, and regulations on the wealthy in order to finance health care for the uninsured. The unemployment rate, meanwhile, has been above 9 percent for 16 months and counting. Has there ever been a more egregious case of misplaced priorities?

The good news is that the political case for extending current tax rates is as solid as the economic case. Campaigning for the extension would put Republicans on the offensive and cleave the Democrats in two. It would demonstrate to the public that a center-right coalition has a reasonable short-term agenda. Perhaps most important, it would open a window for creative thinking about fundamental tax reform, about designing a tax code that levies the lowest possible rate across the largest possible base.

Conservatives and Republicans: Roll up your sleeves.Grit your teeth. The great tax rumble of 2010 is about to start. It’s a fight you can win.

—Matthew Continetti


 

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