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Congress Again Creates Confusion and Again Harms the Economy

Posted By Rea Hederman On September 28, 2010 @ 3:34 pm In Economics | Comments Disabled

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The inability of Congress to stop the Obama tax hikes is already having a real, negative impact on the U.S. economy. Businesses are delaying hiring and investment decisions because they do not know what their tax liability will be next year. Even tax experts have noticed the incredible amount of confusion that now exists as Congress flees D.C. without preventing the tax hikes.

Tax Notes Today reports in “Uncertainty in Tax Code Is Extraordinary, Former Tax Official Note [2]” (gated copy) that former Joint Tax Committee chief of staff Lindy Paull said, “We are entering a state of instability in the tax code. We have never seen such large numbers of expiring tax provisions as we are seeing today.” The jump in the death tax and capital gains and dividends tax rates will substantially raise the cost of investment for firms. Since businesses look ahead for planning purposes, this uncertainty will delay new investments and reduce the opportunity for job creation.

More generally, the broader array of tax hikes will slam the economy while it is already weak, putting off for many months, and possibly years any hope for a robust recovery. Businesses are looking to the economy’s horizon and see the tax hike threat and its implications. The only rational choice for most will be to put a freeze on all hiring and investment plans until economic conditions improve.

Congress has inflicted many sweeping changes on business in the last 18 months. It is no surprise that businesses are leery of expanding in the face of a Congress that is intent on destroying the free market. Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, gave a speech [3] earlier this year saying:

There is a great deal of uncertainty related to major policy initiatives under consideration in Washington. Congress is considering proposals for enormous changes in health care and in the structure of financial regulation. These proposals have generated a great deal of uncertainty, for the capricious winds of politics seem to change them on a near-daily basis. As bankers, you know that too much uncertainty in a business plan makes for a risky loan. The same is true for the economy as a whole. I see this kind of political uncertainty as problematic for the prospects of rapid recovery.

By failing to stop the Obama tax hikes, Congress is again increasing the uncertainty of business costs and doubt about the near-term economy. Businesses will be reluctant to add new workers and new expenses to the balance sheet given the cost uncertainty. Congress should prevent tax increases from taking effect next year by making permanent current tax policy and ensure that businesses will not face higher investment costs next year.


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URL to article: http://blog.heritage.org/2010/09/28/congress-again-creates-confusion-and-again-harms-the-economy/

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

[2] Uncertainty in Tax Code Is Extraordinary, Former Tax Official Note: http://services.taxanalysts.com/taxbase/tnt3.nsf/%28Number/2010+TNT+187-8?OpenDocument&Login

[3] speech: http://www.minneapolisfed.org/news_events/pres/speech_display.cfm?id=4388

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