Thoughts on the Latest Tax Bill
By David Henderson
Pssst: Someone tell the Republicans they won.
Now that I’ve had time to reflect, I do have some thoughts on the tax bill that differ a lot from thoughts of others who are usually my political allies. Most of the criticisms that Scott Sumner and Steven Landsburg make are ones I share. So I’m not judging the tax bill to be good. Viewed in a political vacuum, it sucks. Viewed in the world we’re in, it’s actually a pretty good bill.
I put aside here my huge disappointment about the delay of the sequester. I think we could have gotten just a clean bill on taxes with no delay of the sequester. The problem on the sequester was, I think, more with Republicans than with Democrats because many of the Republicans, probably most, did not want to cut a seriously bloated Department of Defense. But the fact that all sides were willing to delay spending cuts is a serious statement about future efforts to rein in federal spending.
Back to the tax side. Think about the context. Republicans, who, since 1981 have been the anti-tax-increase party, hold only the House of Representatives. The President, who is very hostile to high-income people and very strongly in favor of double-taxing savings, was just re-elected. The Democrats hold the Senate.
Had the Republicans held out for anything like the reforms that Sumner and Landsburg wanted, the bill would have been Dead on Arrival in Harry Reid’s Senate. You don’t even need to bring Obama into the picture. End of story. So then taxes would have gone up dramatically for people at every income level. So what could Speaker John Boehner and Minority Leader Mitch McConnell do?
What they could do is try to raise as high as possible the threshold beyond which marginal tax rates rose. Boehner first tried that with a $1 million annual income threshold before Christmas but couldn’t pass that through the House with just Republican votes. If Republicans regret that, they probably shouldn’t. Harry Reid would have killed that bill also. But, with the New Year’s eve agreement between Vice-President Biden and Mitch McConnell, those large increases in tax rates apply only to singles with income of over $400K and married couples with income over $450,000. That’s bad, but look at what the Republicans got in return.
After years in which Democrats attacked “the Bush tax cuts,” which were temporary (they were originally were set to expire in 2011) many of the Democrats, plus many Republicans, voted to make most of the tax cuts permanent. After a president who wants stiff taxes on capital just got re-elected, the top tax rate on long-term capital gains and dividends rises from 15 percent to 23.6 percent. Had the bill not passed, the top tax rate on dividends would have risen to the 43.4 percent that Obama wanted. After doing a fix almost annually on the Alternative Minimum Tax (AMT) to prevent it from catching about 25 more million households than it typically applies to, Congress and the President have now made the AMT fix permanent.
(I do have one hedge about the AMT. I wrote in a 2007 Wall Street Journal piece that the AMT had the makings of a modified flat-rate tax and that, rather than repeal it, Congress should reform it to make it closer to a flat-rate tax. Now that the fix is permanent, that’s unlikely to happen. But let’s face it: it was always unlikely to happen. Now it’s just become a little unlikelier.)
Oh, and finally, because the Congress and President agreed, we now have a death tax (it really is a death tax: people aren’t taxed on their estates until they die) that takes 40 percent of everything after a basic exemption of $5 million. Does that sound bad? Had the bill not passed, the estate tax would have taken 55 percent of everything past a basic exemption of $1 million.
One other piece of context: At a Hoover event I attended some years ago, after the Democrats had won both the House and the Senate but Bush was in his last two years as president, former Reagan Secretary of State George Shultz said that one of Bush’s biggest mistakes was in not using his political capital, after his 2004 re-election while the Republicans still had both houses, to make the tax cut permanent. With some exceptions, Obama just did.
So here’s the big news: the anti-tax side won. Sure, Obama would love to raise taxes even more, especially on people making between $200K and $450K. But now he has almost zero leverage to do that.
I turned on Rush Limbaugh’s show this morning to see what he was saying and he was denouncing Boehner and company as people who caved. Someone ought to tell the Republicans that they won.