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Archive for the ‘Legislation’ Category

The Good, the Bad, and the Ugly of the Tax Deal

Posted by Dan Mitchell on December 7, 2010

Compared to ideal policy, the deal announced last night between congressional Republicans and President Obama is terrible.

Compared to what I expected to happen, the deal announced last night is pretty good.

In other words, grading this package depends on your benchmark. This is why reaction has been all over the map, featuring dour assessments from people like Pejman Yousefzadeh and cheerful analysis from folks such as Jennifer Rubin.

With apologies to Clint Eastwood, let’s review the good, the bad, and the ugly.

The Good

The good parts of the agreement is the avoidance of bad things, sort of the political version of the Hippocratic oath – do no harm. Tax rates next year are not going to increase. The main provisions of the 2001 and 2003 tax acts are extended for two years – including the lower tax rates on dividends and capital gains. This is good news for investors, entrepreneurs, small business owners, and other “rich” taxpayers who were targeted by Obama. They get a reprieve before there is a risk of higher tax rates. This probably won’t have a positive effect on economic performance since current policy will continue, but at least it delays anti-growth policy for two years.

On a lesser note, Obama’s gimmicky and ineffective make-work-pay credit, which was part of the so-called stimulus, will be replaced by a 2-percentage point reduction in the payroll tax. Tax credits generally do not result in lower marginal tax rates on productive behavior, so there is no pro-growth impact.  A lower payroll tax rate, by contrast, improves incentives to work. But don’t expect much positive effect on the economy since the lower rate only lasts for one year. People rarely make permanent decisions on creating jobs and expanding output on the basis of one-year tax breaks.

Another bit of good news is that the death tax will be 35 percent for two years, rather than 55 percent, as would have happened without an agreement, or 45 percent, which is what I thought was going to happen. Last but not least, there is a one-year provision allowing businesses to ”expense” new investment rather than have it taxed, which perversely happens to some degree under current law.

The Bad

The burden of government spending is going to increase. Unemployment benefits are extended for 13 months. And there is no effort to reduce spending elsewhere to “pay for” this new budgetary burden. A rising burden of federal spending is America’s main fiscal problem, and this agreement exacerbates that challenge.

But the fiscal cost is probably trivial compared to the human cost. Academic research is quite thorough on this issue, and it shows that paying people to remain out of work has a significantly negative impact on employment rates. This means many people will remain trapped in joblessness, with potentially horrible long-term consequences on their work histories and habits.

The agreement reinstates a death tax. For all of this year, there has not been a punitive and immoral tax imposed on people simply because they die. So even though I listed the 35 percent death tax in the deal in the “good news” section of this analysis because it could have been worse, it also belongs in the “bad news” section because there is no justification for this class-warfare levy.

The Ugly

As happens so often when politicians make decisions, the deal includes all sorts of special-interest provisions. There are various special provisions for politcally powerful constituencies. As a long-time fan of a simple and non-corrupt flat tax, it is painful for me to see this kind of deal.

Moreover, the temporary nature of the package is disappointing. There will be very little economic boost from this deal. As mentioned above, people generally don’t increase output in response to short-term provisions. I worry that this will undermine the case for lower tax rates since observers may conclude that they don’t have much positive effect.

To conclude, I’m not sure if this is good, bad, or ugly, but we get to do this all over again in 2012.


Posted in Capital Gains Tax, Death Tax, Dividends Tax, Economic Growth, Government Spending, Legislation | Tagged: , , , , , , | Comments Off on The Good, the Bad, and the Ugly of the Tax Deal

It’s Who Produces, Not Who Spends, That Matters

Posted by Heather Edwards on November 1, 2010

Economists Alex Brill and Chad Hill illustrate in a recent Forbes article that looming tax increases, if allowed to go into effect January 1st, will essentially “bite the hand that feeds long-run economic growth” by disparaging savings, investment and the taxpayers that account for the majority of that investment.

The current administration is promoting the troubling implication that the rich will not miss what they are taxed on because they are less likely to spend that money; therefore giving them a tax break would do very little to boost the economy.  Brill and Hill correctly argue that this logic presupposes that ever-increasing spending of borrowed funds is the answer to the country’s economic woes, and simultaneously neglects the importance of saving by encouraging families to spend, spend, spend because the social safety net will rescue them.

Because “future living standards depend in large part on the willingness of the current generation to save for the future,” when Washington de-emphasizes the importance of saving by taxing returns to savings – or promotes policy that disadvantages investment, hiring workers and growing business – long-term growth will not follow.  Our collective savings are the funds used to allow business to access the capital needed to grow.  Slapping higher taxes on the top percentage of earners will deter savings and further slow growth, as much of the savings available for economic growth comes from that top sector of earners (IRS data for 2007 reveals that households that earn above $200,000 receive 47% of taxable interest income, 60% of dividends and 84% of net capital gains).

Ultimately, increased taxing of top earners is not good policy, economically or otherwise.

Posted in Economic Growth, Legislation | Comments Off on It’s Who Produces, Not Who Spends, That Matters

The High Cost of Tax Hikes

Posted by Heather Edwards on October 25, 2010

A recent Heritage Foundation report highlights the impending effects of an Obama Tax hike through an economic model created by the Center for Data Analysis, which estimates the potential economic and fiscal effects of a tax increase on the American economy from 2011 through 2020. This prototype estimates that inflation-adjusted GDP will fall by a total of 1.1 trillion over the projected period; and slower economic growth will result in less job creation, with an increasing number of jobs lost each year (in 2016 alone job losses would top 876,000). The model also predicts that business investment and personal savings will fall considerably each subsequent year, and that significant amounts of lost disposable income and reduced consumer spending will not result in increased government revenue.

The belief that only higher income earners will be affected is badly mistaken. In fact, higher income earners have greater control over creatively reducing their levels of taxable income. Nearly everyone will pay one way or another, whether through lower income or a rise in product costs. Around half of those subject to the tax increase will be small businesses, which in turn will directly and adversely affect job creation. These results are consistent with basic economics: where tax increases raise the price of capital and labor, economic activity will slow down.

Ultimately, a tax increase is misdirected policy, for the fundamental problem does not lie with revenue intake amounts, but rather with Congressional over-spending. As this paper argues, “Congress must come to terms with the need to find a new fiscal balance point through lower spending and fundamental entitlement reform that also supports strong economic growth.”

See here for the full report.

Posted in Economic Growth, Legislation | Comments Off on The High Cost of Tax Hikes

Is Current Tax Debate Following the Path of 1978?

Posted by Brian Garst on September 15, 2010

In 1978 Democrats controlled both the White House and Congress. They wanted to raise taxes. By the end of the year, the seemingly impossible occurred: Carter’s original proposal to tax capital gains at ordinary income levels was turned into a large capital gains cut instead. With the party in power desperate to turn around the floundering economy at the time, pro-growth policies were finally given their due.

Could 2010 see a repeat? Mark Bloomfield, President of the American Council for Capital Formation and member of the Double Taxation Working Group, sees similarities:

“THERE ARE SIMILARITIES between now and 1978,” he says. Thus, there’s a chance that Democrats in Congress could pull a surprise move next year and propose a reduction in taxes on savings and investments for all, which would appeal to Republicans. This concession would occur regardless of the outcome of the November mid-term election and regardless of President Barack Obama’s thoughts on the matter, because Congress, in the face of stubbornly high unemployment, will be desperate to spur the economy. It happened before under almost identical economic circumstances when Jimmy Carter was president.

Why will the Democrats wait until next year? Bloomfield says they are restricted by a tight legislative calendar and will elect, in the name of expediency, to extend the Bush tax cuts for one more year—to Dec. 31, 2011. Democrats have been hinting at such a move for weeks.

Posted in Capital Gains Tax, Legislation | Tagged: , | Comments Off on Is Current Tax Debate Following the Path of 1978?

Heritage Looks at Jim Jordan’s Economic Freedom Act

Posted by Brian Garst on August 19, 2010

This Heritage Foundation report looks at the Economic Freedom Act, proposed legislation by Jim Jordan, which includes a permanent repeal of the capital gains tax and the death tax, two goals of the Double Taxation Working Group:

The Economic Freedom Act (H.R. 5029), introduced by Representative Jim Jordan (R–OH), would terminate the Troubled Assets Relief Program (TARP) and repeal the remaining stimulus spending, reducing a number of taxes as economic stimulus instead. These tax reductions would include: permanent repeal of the individual and corporate capital gains tax; reduction of payroll taxes for employers and employees by half for 2010; repeal of the estate tax; and a reduction of the top corporate tax rate from 35 percent to 12.5 percent.

A static and dynamic analysis of the Economic Freedom Act performed by analysts in the Heritage Foundation’s Center for Data Analysis shows that the relief and stimulus would be significant, and the dynamic economic effects would offset much of the cost of the reduction in tax rates over the longer term. Over the 10-year window (2011–2020), however, the act would increase the deficit because the act’s reduction in spending (such as the repeal of TARP) does not offset the cost of the reduction in tax rates. However, Congressman Jordan also supports the FY 2011 Republican Study Committee (RSC) budget plan, which proposes spending cuts designed to eliminate the deficit in 10 years. Coupled with such a plan, the Economic Freedom Act would be much more affordable.

The DTWG does not endorse specific legislation, but encourages all lawmakers to look for responsible ways to eliminate instances of double taxation.

Posted in Capital Gains Tax, Death Tax, Economic Growth, Legislation | Tagged: , , | Comments Off on Heritage Looks at Jim Jordan’s Economic Freedom Act

Senators Vote to Reinstate Death Tax

Posted by Brian Garst on July 23, 2010

On Wednesday Senator DeMint did as promised and forced a vote on permanently repealing the death tax.  Because Harry Reid has complete control over the Senate agenda, DeMint was forced to use a procedural move to get the vote.  This means it would have taken 67 votes to approve the measure.  Sadly, only 39 Senators voted to prevent the death tax from skyrocketing at the end of the year.

Looking at it another way, 59 Senators voted for a massive death tax increase in the midst of a recession.  The additional burdens placed on the economy by this tax on capital will result in the loss of as many as 1.5 million jobs, explains Working Group member Curtis Dubay of the Heritage Foundation in a new paper.

Posted in Death Tax, Legislation | Comments Off on Senators Vote to Reinstate Death Tax

Senator DeMint Seeks to Force Death Tax Vote

Posted by Brian Garst on July 20, 2010

We recently praised Senator DeMint for his efforts on capital gains and dividends.  Now, he’s promising an effort to force a vote this week on permanently eliminating the death tax.

“The death tax kills jobs, hurts small businesses, destroys family farms and President Obama’s plan to hike it from zero percent  to 55 percent next year is unconscionable,” said Senator DeMint. “The death tax is an unfair, immoral double tax on property and assets that folks have already paid taxes on throughout their lives…”

The death tax continues to feature prominently in the news.  In addition to Senator DeMint’s efforts, Nevada Senate candidate Sharron Angle will hold a press conference with the American Family Business Institute, a Working Group member, on July 22nd to announce her signature of the AFBI’s “Death Tax Repeal Pledge.”  AFBI has an interactive map tracking the over 300 candidates which have already signed the pledge.

Here are some other mentions of the death tax in the news:

Posted in Death Tax, Legislation | Tagged: , , , | 1 Comment »

The Death Tax is Back from the Dead

Posted by Brian Garst on June 28, 2010

In 2011 the “death tax” will make a roaring comeback after a year-long hiatus.  Democrats never got around to plugging the “gap,” or zero percent rate, for all of 2010 as they promised they would when they took control of Congress and the White House.  This has resulted in a rare year of tax fairness for estates that had grown used to the prospect of facing oppressive double taxation, as already taxed assets are raided by the government from grieving families.

That 2011 will see the death tax again reach a rate of 55% isn’t enough for some in Congress, such as Bernie Sanders, one of the few members honest enough to admit being a socialist.  Along with Tom Harkin and Sheldon Whitehouse, he has introduced the Responsible Estate Tax Act.  Curtis Dubay of the Heritage Foundation reports:

If Congress does nothing and the death tax does rise from the dead next year it will come back with a punitive rate of 55 percent and exemption of $1 million ($2 million for couples), enough by itself seriously to slow the recovery. This draconian tax rate and less-than-generous exemption level is not enough for Senators Sanders, Harkin and Whitehouse, however.

Their proposal would set the top rate at 65 percent for the largest estates. For smaller estates the rates would range from 45 percent to 55 percent. The first $3.5 million ($7 million for couples) would be exempt for the death tax.

If the Senators’ plan became law, Americans that work hard, live a virtuous life, create jobs for other Americans and build wealth for their families would see a large majority of what they have built confiscated by a profligate government to be redistributed as seen fit by Washington. A death tax at such levels would certainly become the nightmare of the American dream.

While the death tax does not hit a large percentage of Americans, those it targets are disproportionately responsible for the creation of jobs.  Some wealthy figures, like Bill Gates and Warren Buffet, are routinely trotted out as examples of rich individuals who approve of the tax.  This, we are told, means it isn’t really unfair.

If Bill Gates and Warren Buffet want their money handed to the government when they die, that’s fine.  They have the right to direct their estates however they please, and nothing is stopping them from simply cutting a fat check to the federal government right now.  Nothing about being wealthy, however, gives them the right to submit the money of others to the government on their behalf, especially when it is money that has already been taxed.  The death tax is an example of unfair double taxation, and it should stay dead in 2011 and beyond.

Posted in Death Tax, Legislation | Comments Off on The Death Tax is Back from the Dead

DeMint Amendment Falls Short

Posted by Brian Garst on June 24, 2010

DeMint’s amendment to prevent the current rate on capital gains and dividends from increasing to 20 percent at the end of the year fell well short on Wednesday.  The only party defectors in the 40-57 defeat of the amendment were Democrat Ben Nelson, who supported the measure, and Republican George Voinovich, who opposed.  In a  press release, DeMint’s office said, “The failure to pass Senator DeMint’s amendment could threaten more than 680,000 jobs over the next two years, reduce family incomes by over $1600 by 2012, and lead to cuts on the income of seniors that depend on dividend payments in retirement.”

While some surprising countries are taking giant steps forward on this issue, it is unfortunate that America seems intent on stepping backwards, especially at a time already fraught with economic uncertainty.

Posted in Capital Gains Tax, Legislation | Tagged: | Comments Off on DeMint Amendment Falls Short

Senator DeMint Fights Against Tax Increase on Capital Gains and Dividends

Posted by Brian Garst on June 22, 2010

In today’s political climate of big government, big spending and big taxes, it’s important to recognize when someone in Congress stands up and gets it right.  Senator Jim DeMint did just that recently when he proposed an amendment, to the current tax extenders bill being debated, that would permanently extend the Bush tax cuts on capital gains and dividends.

While describing his amendment on the Senate floor (video), DeMint cited research from the Heritage Foundation which found that failing to prevent the impending increase would “drive investment abroad.”  He also discussed the issue with Neil Cavuto:

We should thank Senator DeMint for leading on this important issue.

Posted in Capital Gains Tax, Legislation | Tagged: | Comments Off on Senator DeMint Fights Against Tax Increase on Capital Gains and Dividends