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Tax Hike Prevention: A Good Idea

Posted By Brian Darling On September 14, 2010 @ 2:00 pm In Economics | Comments Disabled

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Senators Mitch McConnell (R–KY) and Chuck Grassley (R–IA) have introduced legislation titled the Tax Hike Prevention Act. According to information provided with the release of the legislation, it provides for a “permanent extension of the provisions of the 2001 and 2003 tax bills, permanently patches the AMT [Alternative Minimum Tax] and includes the Lincoln/Kyl death tax [2] provisions for 2011 and beyond (i.e., a $5 million exemption and a 35 percent rate on amounts above).” Ideas that extend tax reductions are good for the economy and private enterprise.

Preventing taxes from increasing is a good idea. It is unclear if the McConnell/Grassley legislation will come up as an amendment to other legislation before the next recess, but it will be the subject of discussion over the next few weeks.

According to Politico [3], “Red-district Democrats are pressuring Speaker Nancy Pelosi to extend Bush-era income tax rates for all brackets, revealing a high-stakes rift between the party’s vulnerable moderates and its safe liberals as the issue increasingly dominates the national debate.” This debate will play out in some form in the House and Senate before the fall elections.

The rights of the minority are limited in the House and Senate because of the strong-arm tactics of Speaker Nancy Pelosi (D–CA) and Senate Majority Leader Harry Reid (D–NV) to block opportunities for Members to offer amendments and get votes on bills. House Members may have an opportunity for a “motion to recommit” to force votes on extending all the tax cuts, and in the Senate there may be an opportunity to offer amendments to the defense authorization bill scheduled to come up next week. Pelosi and Reid may be motivated to allow a vote on extension of the tax cuts if enough pressure is put on leadership to schedule a vote. This has the potential to be a signature bipartisan accomplishment if both Republicans and Democrats can put aside differences to pass a two-year extension of all the tax cuts.

Even President Obama’s former Director of Office of Management and Budget, Peter Orszag, argued in The New York Times [4] for “compromise.” Orszag argued to “extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.” Now this may be a political calculation to argue for a temporary extension of all of the 2001 and 2003 tax cuts, but the reason Orszag is arguing for a temporary relief is because “no one wants to make an already stagnating jobs market worse over the next year or two, which is exactly what would happen if the cuts expire as planned.” Even a liberal former Obama Administration official sees the harm of doing nothing and allowing these tax cuts to expire. That is why many conservatives have called inaction the “Obama Tax Increases of 2011.”

One idea contained in the McConnell/Grassley approach is to maintain current law for all income tax brackets. As J. D. Foster argues in a Heritage Foundation product titled Obama Tax Hikes Defended by Myths and Straw Man Arguments [5], “Failure to extend current tax policy would impose massive tax hikes on millions of Americans. Preserving current tax policy is not a tax cut.” The Obama Administration is arguing that preventing a tax hike on the “middle class” is a tax cut. This is a false assertion. If nothing is done, at the end of this year Americans paying taxes will be hit with a massive across-the-board tax increase.

Another idea contained in the McConnell/Grassley bill is preventing the return of the marriage penalty. It makes sense that married couples should not be punished and treated differently than non-married couples for tax purposes. To excessively tax marriage would be to punish an idea that should be promoted by the tax code or, at a minimum, left alone.

The McConnell/Grassley legislation preserves the current rates on capital gains and dividends. The top rate on qualified dividends will go from 15 percent to nearly 40 percent. Because dividends are owned disproportionately by seniors in relation to capital gains, this rate jump will hurt elderly Americans. According to Rea Hederman and Patrick Tyrrell [6] of The Heritage Foundation:

With the dividend taxes scheduled to rise in 2011, a major distortion in the federal tax code will return. The top marginal rate on dividends will again be almost twice the tax rate of capital gains. The tax code will encourage companies to prefer capital gains distributions over dividends. This will be especially harmful to taxpayers, like seniors, that rely on dividend payments. Higher taxes on dividends will also harm American companies that are competing in the global marketplace. If America wants to solidify its position as the leader of the world economy, it must strive for tax policies that support growth, not those that undermine a firm’s ability to compete. Congress should extend the tax relief so that dividends and capital gains can be taxed at the same rate.

Clearly the McConnell/Grassley plan is an attempt to continue the pro-growth tax policies promoted by the Bush Administration in 2001 and 2003, yet they seem to have made one strategic mistake with the death tax: [2] The plan includes language promoted by Senators Jon Kyl (R–AZ) and Blanche Lincoln (D–AR) that provides for a 35 percent death tax rate with a unified-exemption amount of $5 million (per individual). Right now the death tax (also known as the estate tax) is at 0 percent. This would have been a great time to eliminate the death tax for good [2].

The bottom line is that this debate is going to happen over the next few weeks in the House and the Senate. Clearly, Blue Dog Democrats in the House and the Republican leadership in the Senate are looking for opportunities to push for votes on an extension of current law with regard to tax policy.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/09/14/tax-hike-prevention-a-good-idea/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/TaxCalculator.jpg

[2] death tax: http://www.heritage.org/issues/taxes/death-taxes

[3] Politico: http://www.politico.com/news/stories/0910/42042.html

[4] The New York Times: http://www.nytimes.com/2010/09/07/opinion/07orszag.html?_r=1

[5] Obama Tax Hikes Defended by Myths and Straw Man Arguments: http://www.heritage.org/Research/Reports/2010/09/Obama-Tax-Hikes-Defended-by-Myths-and-Straw-Man-Arguments-Summary

[6] Rea Hederman and Patrick Tyrrell: http://www.heritage.org/Research/Reports/2010/09/Obama-Tax-Hikes-Dividend-Tax-Increase-Hurts-Seniors-and-the-Economy

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