For more than four years, the Republican Party majority in the House and Senate has been intent on tax cuts. Got a budget surplus? Enact a tax cut, with significant benefits for wealthy investors. Oops. Got a budget deficit, in fact a string of substantial deficits? Enact a tax cut or in fact a whole series of tax cuts, with hopes that at least some of that extra after-tax money will be reinvested, create jobs, and lead to some revenues to offset the loss. Anyway, the government can always borrow from the UK, China or Japan or even one of those tax-haven countries to make up the gap. The important thing is to get money back to the wealthy at the top of the income distribution chart. Especially good for that are provisions that lower--or even reduce to zero--the tax on capital gains and even the dividend income that comes from owning capital assets.
That tax cut no matter what logic has led a unified Republican majority in Congress to pass major legislation every year, with a parade of timing gimmicks to give the appearance of striving for reasonable fiscal balance. This year, the unity in the ranks is breaking, with the House and Senate developing radically different bills that serve substantially different purposes. The split is ably described in a November 26 Washington Post article by Edmund Andrews, here. The first few paragraphs are worth quoting in full (with paragraph markings collapsed compared to original).
"Republicans of all stripes want to cut taxes, but rarely have they been in so much disarray about whose to cut.
"If House Republicans and President Bush have their way, more than half of tax reductions over the next five years will go to the top 1 percent of households, those with average incomes of $1.1 million. House leaders are pushing a $63-billion tax-cutting package that would extend President Bush's tax cut on stock dividends, protect oil companies from a windfall profits tax and shield people caught using illegal tax shelters."
"The Republican-controlled Senate, by contrast, has passed a bill that would cut taxes by $59 billion but ignore Mr. Bush's top priority, and that contains two other provisions that have provoked his wrath. The Senate bill omits an extension of Mr. Bush's tax cuts for stock dividends and capital gains, which are to expire at the end of 2008. Instead, almost half of the bill is devoted to shielding middle-income and upper-income families from the alternative minimum tax. The Senate bill has also proposed two revenue-raising measures that Mr. Bush has threatened to veto: a one-year, $5-billion tax on major oil companies and a provision that would make it easier to impose steep penalties on people caught using illegal tax shelters."
Of course, the House billl could still change considerably when taken up again in early December. For the nonce, however, the bills are so different that it is hard to see how they will be reconciled in conference.
The Senate bill includes a number of provisions directed towards the Gulf area damanged by the hurricanes, including creation of a Gulf Opportunity Zone with special depreciation and expensing provisions and other relaxations of tax rules intended to incentivize recovery and reconstruction. It provides for a one-year extension of the enhanced AMT exemption amount to prevent additional taxpayers being added to the AMT rolls, at a higher level of $62,550 for married taxpayers and $42,500 for singles, with a substantial cost of about $27 billion. It also includes extension of a number of the expiring tax provisions that should be allowed to expire, including enhanced small business expensing provisions and brownfield remediation expensing. Offsets include three provisions targeted at Big Oil that have drawn sharp criticism from the White House: 1) a provision that effectively disallows 75% of the benefit of LIFO accounting for the biggest oil companies, 2) elimination of the Energy Policy Act's special 2-year amortization provision for certain geological expenses of the big oil companies, and 3) modification of foreign tax credit rules for Big Oil companies that are dual capacity taxpayers. Other anti-abuse provisions include strengthening of tax shelter penalties, tax preparer standards, and codification of economic substance doctrine.
The House bill takes a noticeably different tack. It would extend the net capital gain rate coveted by wealthy investors but would not provide AMT relief for middle-income taxpayers. It would not subject Big Oil to any of the provisions included in the Senate bill. The New York Times article reports the Tax Policy Center conclusion that a whopping 51% of the House tax cuts would go to the top 1% of income earners.
Congress should take a step back from the tax cut musical chairs game that has propelled it along for the last four years. It needs to consider the consequences of additional tax cuts that primarily benefit the wealthy coupled with cuts to the safety net provided by Medicare, student loans, and other programs that suffered the budget ax in the recent bills. The capital gains and dividends cuts that shift the tax burden away from capital and on to labor are simply wrong-headed. The House should follow the Senate on this issue--it should pass no extension of the capital gains rates and some extension of the AMT protection for ordinary Americans, along with at least some of the anti-abuse provisions, including the reversal of the LIFO accounting benefit for Big Oil.