Tuesday, May 09, 2006

Tax policy: some good news and some bad news

First the good news: Bush plans to name Eric Solomon the Assistant Secretary of the Treasury for Tax Policy. Solomon, one of the few people I can think of to serve under both the Clinton and Bush Administrations without having a set term, is one of the good people in government. My guess is that more political people didn't want the job or had confirmation issues or both.

The bad news is that the Republicans in Congress have agreed to a $70 billion tax cut bill. That's $70B over two years - it's just temporary extenders of reduced capital gains and dividend rates and AMT relief. So it brings us a larger fiscal gap and only a tiny respite from the nightmare the Republicans caused in 2001 and 2003 with all of their dishonest, rent-extracting phaseouts of new provisions. (Rent-extracting because they make their fat-walleted friends keep lobbying them for extension.)

One way they are going to "pay" for keeping the hit at "only $70B is to lose money for the government over the long run by inducing people to shift from traditional IRAs (deduction upfront, inclusion on the backend) to Roth IRAs (no deduction today, ostensibly no inclusion upon withdrawal). The myopia of a 2-year budget window permits them to present this long-term revenue-losing shift (since people have to be compensated to switch) as revenue raising. So it is as dishonest and irresponsible as most other things in recent tax legislation, if not more so.

Worse news still is that, to keep this at $70B and keep more tax cuts coming in the future, they deliberately left out "extenders" with strong and bipartisan political support, such as the research and development credit. That way, they get to cut taxes still more later on.

Bush I expect to hail this while at the same time grandstanding about how demanding a $20B cut (over 5 years?) in a pork barrel spending bill makes him a deficit hawk.

48 comments:

Mark Witte said...

These "rent seeking" phase-out provisions are brilliant. They keep down the projected cost of the tax cut, which helps get it passed, and then get lobbiest to keep on shelling to get them extended. Amazing.

Anonymous said...

SO disappointing that a tax professor from such an esteemed institution could be so blindly partisan. Your students deserve better. You would have the government throw good money after bad on trying to slap a band-aid on the AMT. I'm an AMT payor who happens to believe the patch is a bad idea. We can't keep treating the symptoms while the disease goes unchecked. As for cap gains and dividends, CBO shows that lower rates mean MORE TAX REVENUE. The two years in the history of the US with the highest tax revenue have both come under the current President.

You do have ONE thing right though. Eric Solomon's appointment is long overdue. He is one of the great ones.

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