Tax Cuts and Loopholes

Womenstake, a blog network run by the National Women's Law Center, has an interesting post on recent Congressional votes on various bills.  It's called "One Tax Loophole Gets Closed: Can We Make It a Trend? (June 18, 2008, Joan Entmacher).

The post praises Congress for paying for some of its tax largesse by closing loopholes--in this case, the provision in the new law providing tax assistance for military families that prevents Defense contractors from setting up shell companies offshore to avoid paying payroll taxes in respect of their employees. The post goes on to consider the House Ways and Means bill to "patch" the AMT, with offsets including taxing fund managers on their compensation the same way that bricklayers are taxed on their compensation (ie, at regular "ordinary income" rates rather than preferentially low capital gains rates) and the extender bill (with more child care credits and alternative energy incentives) that has been blocked in the Senate because of its resistance to paying for it by eliminating the fund managers' ability to defer income using offshore entities and other revenue raisers.

Here are the lines that count most in the posting:

1. Alas, as we’ve said before, there is no tax fairy to make up for lost revenues. Will we continue to cut the services women and families need to pay for tax cuts?

Comments

[Matt Rasmussen, BC]

Hi Prof. Beale, I just read an article in the Wall Street this morning interviewing Robert Mundell. He takes the position that the Bush tax cuts should be made permanent and any tax increases would be a disaster to the US economy. I don't know a ton about Mundell other than he helped bring about the euro-zone and believes in "supply-side" economics. What are your thoughts? Hope you're doing well!

[LindaMBeale]

Mundell's position isn't new--it is the standard GOP/big business position that letting the Bush tax changes sunset as they are currently set to do would amount to a tax increase and be disastrous. I disagree, for several reasons. Businesses have reaped enormous benefits out of the various "temporary" cuts (like accelerated depreciation) and know that they are not likely to be sustainable over the long term. A significant number of the business tax cuts merely reward behavior that will take place anyway--one obvious example is the R&D credit (instead of the rational deduction); another example is the accelerated deprecation (businesses have to purchase equipment to stay competitive); yet another is the section 199 "manufacturing" deduction that accomplished a rate reduction for particular industries (and then was extended to most of oil and gas at lobbyists' demand, etc.). As for individuals, eliminating the tax benefits to the very wealthy put in place by the Bush administration (the estate tax, the top rates, the capital gains rate reduction) won't negatively impact our economy at all (the wealthy can't spend all their money anyway): in fact, the extra funding for the government should help fund important long-term infrastructure projects, making a significant positive impact on the economy.