The Dems' Tax Cut Flip-Flop
Saturday, the Senate nixed plans to extend the Bush tax cuts. But lost in the partisan fight is the fact that the cuts were once backed by many senior Dems.
This weekend, the Senate blocked proposals which would have extended the Bush era-tax cut. But lost in the partisan fight is the fact that the original cuts were backed by both Republicans and Democrats.
The final of the Bush-era tax cut bills, the Economic Growth and Tax Relief Reconciliation Act of 2001, was controversial. But when enacted, the ultimate vote in the House of Representatives was two hundred and forty in favor and one hundred and fifty-four against, with twenty-eight Democrats joining two hundred and ten Republicans in a House split almost equally between Democrats and Republicans. In the Senate where the Democrats held a bare majority with fifty votes, the Republicans with forty-nine and a single independent, the vote was fifty-eight in favor and thirty-three against, a virtual non-partisan landslide in favor of the Bush tax cuts.
Both in retrospect and looking at Saturday's Senate vote (which rejected plans to extend the cuts), the vote for the Bush tax cuts in the Senate was fascinating on the Democratic side of the aisle. A decade ago, twelve Democratic senators voted in favor and five Democrats did not vote. Included with the “yes” votes were Democrats Feinstein, Lincoln, Cleland, Carnahan and Baucus, all very prominent Democratic leaders. The non-voting Senators included Boxer, Kerry, and Leahy, the current leadership of the Democratic Party.
Who remembers that in 2001, the Bush tax cuts were passed almost two to one with thirty percent of the “yes” votes in the Senate being Democratic? Good, bad or indifferent, the Bush-era tax cuts were far from a solely Republican enterprise.
A decade later, where defeat was assured for the Democrats for only a partial extension of the Bush tax cuts, all three of the Democrats still in the Senate (Feinstein, Lincoln and Baucus) voted against the full extension of the cuts. Wouldn't it be nice to know exactly why these three remaining Democratic Senatorial “yes” votes thought that lower taxes for everyone was good for everyone a decade ago and not such a good idea today? Is it new economics? Is it the change in economic circumstance? Is it purely politics?
Regardless of the thought processes of a 58 -33 vote a decade ago, the clock has kept ticking and December 31, 2010 is almost upon us. For reasons clearly political, Congress is determined to deal with the issue before the year ends. While that clock was ticking over the last decade, unemployment ranged between 4.3% and 5.8% until the summer of 2008, never ticking above 6.0% after October of 2003. This was a pretty good run. Now, with the unemployment rate not seeing anything better than 9.4% since April of 2009, Congress finds itself addressing the issue of continuing the tax cuts with no time to do more than make political arguments (on both sides) while unemployment is at spooky levels. All other issues aside, if tax increases for some are going to impact unemployment on a national level, not passing the continuance of current tax rates is a very bad idea.
Having written about this previously, Congress also faces the expiration of the "AMT patch" on December 31, 2010. If this is not fixed by the end of the year it will specifically target the middle class with $70 billion in tax increases.
There are some important questions to answer: First, is it better for the United States if the Bush tax cuts are continued for only some or for all? Second, what are the politics?
There are a couple of truths and then it really is a question of economics, philosophy and politics.
1. Truth one is that increasing tax rates from 35% to 39.6% is not going to change the lifestyle of very many of the taxpayers impacted.
2. Truth two is that increasing tax rates on investment income from 15% to 43.4% on investment income in 2013 is not going to change the lifestyle of very many of the taxpayers impacted.
3. Truth three and this is the problem, is that increasing these taxes will impact the behavior of these taxpayers and that change in behavior could result in serious economic pain to those who are not making over $250,000 a year.
An example may be useful with respect to the above. If a taxpayer invests today in a dividend paying company, the company first pays Federal and state taxes approximating 40% of its income and then, if it pays a dividend, the taxpayer (in California) pays additional taxes of about 25%. Therefore $100 of corporate earnings turns into $45.00 for the investor. If dividends are to be taxed at 43.4% and along with state taxes, government taxation would reduce the investor's return to about $28.00. The government would be getting $72.00 of the $100.00 of corporate earnings. Few could argue investment decisions will change dramatically if these increases were to occur.
The increase in tax rates for the highest rate taxpayers will make that money vanish from the private sector. Not good. These dollars will produce jobs. We don’t know how many, but the increased taxes on dividends will impact investment decisions. Investors will quickly gravitate to investments that do not pay dividends. The allocation of risk capital will change. Not good. How much? We don’t know, but my very educated guess is that the world of investments will change dramatically as the after-tax return on dividend paying investments withers to almost nothing. Either alone or together, these rate increases for the wealthiest taxpayers could mean many fewer U.S. jobs. Not good.
This is where the discussion should take place. Who would tax rates increases hurt the most? The immediate and highly visible pain may be to the higher income taxpayers; that would not be severe, like a cut from shaving. But ultimately, when the middle income taxpayer is forced out of work because of either a reduction of investment dollars as the result of the higher tax or a disinterest in minimal returns for the investment risk, that is a nightmare for the individual who cannot find employment, more like a heart attack.
As to the politics, the Democrats have it wrong. Most taxpayers are far more concerned with their own tax situation. Anyone below the current 25% tax rate on their highest dollar of income, and that is most Americans, could not care less about the entire discussion. Current revenue/expense decisions being made in Congress seem not to impact political spending so raising taxes on anyone seems a bit odd. That is why the voters seem to have gone with a preference for spending reductions, not tax increases.
Woe be to the Democrats if they cannot get a deal done before December 31st. When that new Republican House of Representatives starts sending bills to the Senate every morning in January asking for tax cuts for everyone and repealing what will be quickly classified as tax increases the Democrats could have stopped, it will not be pretty. That first check with the higher withholding taxes will get everyone's attention and the Republicans will be seen as riding to the rescue.