Friday, April 11, 2008

Get Ready to Pay (A LOT) More Taxes

In an effort to assuage its guilt over its decade-long “bipartisan spending binge,” Congress is set to impose “the largest increase in personal income taxes since World War II.” So note John F. Cogan and R. Glenn Hubbard in this WSJ op-ed.

Lower income households will see their taxes go up by as much as 50%. Parents with children under 17 will see their taxes increased by $500 per child. Married taxpayers will see the return of the marriage penalty. Investors will experience a 33% increase in capital gains taxes. If you think this is only going to hit the “rich” people, bear in mind that more than half of all taxpayers are now investors. With inflation on the uptick, effective capital gains taxes will be about 70%. The Alternative Minimum Tax, which was initiated to catch a dozen high rollers that would otherwise avoid federal taxes, will ensnare 25 million taxpayers, most of them from the middle class.

How does Congress assay to pull off such a massive tax increase? By doing nothing.

Normally I think it’s a good thing when Congress does nothing. But too often Congress does nothing when it should do something and vice versa. I have often cited LaVarr Webb’s contention that Congress is capable of doing only two things: overreact and nothing. It’s almost as if Congress has figured out an insidious way of doing both of these things simultaneously.

How is this possible? Back in 2001 and 2003 when President Bush worked to get his tax cut plans pushed through Congress, he found the plans stymied by members of his own party plus a small number of Democratic senators that had enough power to kill the bills via filibuster. Finally, Bush settled for temporary tax cuts as a compromise.

The plan was to come back and make the tax cuts permanent before the end of Bush’s second term, but that only happened with a small number of provisions. The rest of the tax cuts are set to expire in 2010 unless Congress does something to stop that from happening.

The Bush tax cuts spurred economic development and helped bring an end to the 2000-02 economic downturn. Moreover, government revenues have increased dramatically. The only problem was that Congress, with the President’s blessing, went hog wild increasing spending at a much higher rate than revenues increased. I may never forget former Rep. Tom DeLay’s (R-TX) 2005 pronouncement that there was “no fat left to cut in the federal budget.”

There is no shortage of progressive types that love the idea of getting rid of the Bush tax cuts. They argue that this “is necessary in the near term to balance the federal budget, and necessary in the longer term to finance the retirement and health-care promises made to the baby-boom generation.” Perhaps these progressives could support Rep. John Campbell’s (R-CA) Put Your Money Where Your Mouth Is Act instead. “But,” argue Cogan and Hubbard “a tax increase is neither wise nor necessary.”

Cogan and Hubbard show how the budget can be balanced, even with some additional tax cuts, and even while continuing military operations in the Middle East plus beefing up national security. This sounds great, but it calls for something that seems to be complete anathema to our federal politicians: fiscal restraint. Oh, they like to say those words, but they don’t vote that way. The electorate doesn’t require them vote that way either.

To put it another way, voters largely accept increased government spending. They seem not to understand that THEY are the people that must foot the bill. For a humorous (but telling) view of this topic, watch this clip. The whole thing is fun to watch, but you can skip to the 1:50 mark for the 30 seconds of pertinent content, if you wish.

The reason that most voters don’t care about our expanding government, asserts Stephen J. Entin, President of the Institute for Research on the Economics of Taxation in this WSJ op-ed, is that due to the social engineering portions of the Bush tax cuts, “over 40% of the population owes no federal income tax, and about half who owe nothing actually get net refunds.” These people “embrace higher taxes and more government spending, because someone else seems to be paying for it.” For them, “general government is practically a free good” or else an income source. In actuality, everyone ends up paying, but in the less visibly connected forms of higher prices and reduced income.

In a system engineered by politicians, most federal spending increases are actually on autopilot. Just as the Bush tax cuts will expire without congressional action, most federal budget items automatically increase unless congressional action is taken to stop or reduce those increases. Guess how often that happens. Republicans recognized too late, as Jonathan Rauch put it back in 2006, that they were “captives of their own machine.” He wrote that “political entrenchment militates against governmental reform.” GOP congressional power created a “fortress [that was] conservatism's prison.”

In the interim between now and the sunset of the Bush tax cuts, I suppose voters will glide along, voting for presidents, congressional representatives and senators, serenely oblivious to the impending massive tax increase. That is, until they compute their 2011 taxes during the first quarter of 2012. This will be during the primary voting season of the 2012 presidential race.

Congress does actually seem interested in making part of the Bush tax cuts permanent. But the parts they like are the social engineering aspects that harm economic growth and reduce revenues. Many federal politicians seem enthusiastic about allowing the growth elements of the tax cuts expire. They assume that doing this will avert a general tax revolt. Besides, they will be able to say that they’re making the “rich” pay their “fair share.” Never mind that such a massive tax increase on those that already foot 97% of the bill will make today’s economic slowdown look like a picnic. Can you say, “unemployment,” children?

Americans may have come to accept Big Government as inevitable, and perhaps even desirable. But they haven’t warmed to the idea of paying for it yet. Congress seems to be working to provide services to Paul by charging Peter, in the hope that Paul will have more votes come Election Day. Judging from the ungrateful and ignorant Pauls out there, this sinister plan just might work. But at what cost?

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