IN SEARCH OF A TRULY CONSERVATIVE TAX POLICY
The Bible tells us "a double-minded man is unstable in all his ways." This is true not only for individuals in my view, but can also be said for political parties, "movements," and certain other groupings of people. In its early days, the Bush administration—together, on occasion, with the congressional Republican leadership—has been at war with itself. On the one hand, Bush in particular has scuttled his own professed goals of genuine tax reform by, at the behest of his handlers, seeming to have a competing goal of desiring shallow political victories.
With Bush thus at war with himself--and moving inexorably toward some kind of deal over which he could claim "victory" politically--the result has been the passage of an alleged $1.35 trillion "tax cut" plan which seems to have outdone past major legislation in its idiocy and complexity. In the innumerable volumes of commentary, punditry and reporting on the package, I’ve seen or heard it described as a "witch’s brew," a "dog’s breakfast," and, most simply, a "sham." These characterizations, mind you—and many like them—all came from conservatives.
In stumping the country in the weeks of late winter and early spring, President Bush correctly—and often eloquently—railed against Washington’s increasing bite being taken out of Americans’ wallets. "Our country is at peace, but our government is charging war time prices," he remarked on more than one occasion. The trouble is, for a variety of reasons, the convoluted final bill he ended up agreeing on with House and Senate conferees does precious little to reverse this trend. In fact, as I’ll argue in a little while, the whole package threatens to blow up in the faces of both Bush and Republicans in the next year or two; among the consequences would be to seal the fate of any legitimate tax reform/tax cut measures that may be proposed down the road.
With my dramatically increased presence on conservative (and even some "liberal") talk radio shows in recent months, I have had numerous opportunities to throw in my two cents on Bush’s original proposal. The first thing I always tried to point out is that candidate Bush’s $1.6 trillion ten-year tax cut was more of a political gimmick than a carefully thought out policy proposal attempted to achieve a desired end (i.e.: meaningful tax reform and reduction). Even to the extent that it was the latter, it must similarly be remembered that the package was crafted way back in 1998, a time when the outlook for both the economy and for Washington’s prospects for ever-rising tax revenue was markedly different. Consequently, even the few decent proposals in the original Bush plan would be inadequate at a time when much more is needed in the way not only of a Keynesian-style stimulus but, more importantly, for major structural reforms/incentives.
Over the coming decade, the U.S. Treasury is currently forecast to be the recipient of some $25 trillion in revenue. Thus, the $1.35 trillion tax cut that was passed amounts to a paltry 5.4% of that amount. This is hardly the stuff indicative of reducing the size of government. Further, most of these cuts do not materialize until the latter part of this decade—and then, in a quirk which appears to be without precedent—all of the cuts are "repealed," with both tax rates and priorities reverting, in most cases, to what they were in 2000.
More insidious is what the bill does not do with what is known as the alternative minimum tax. This convoluted levy was dreamed up years ago to "soak the rich" by requiring taxpayers with significant deductions to actually figure their tax twice: first, by taking into account their deductions and appropriate tax bracket, and then by using a lower tax rate without taking most of their deductions. This requires the taxpayer to send Uncle Sam the larger of the two calculations.
Daniel Kadlec, in the June 11 issue of Time magazine, describes the looming tax increase set to hit millions more Americans in the next several years because of the AMT: "Because the AMT, which now affects some taxpayers making less than $100,000 a year, is not indexed to the inflation rate, it is creeping up on many middle-income taxpayers. This year 1.4 million paid the tax. That number is expected to reach 5.6 million in 2004 and more than 35 million in 2011. And there’s the rub. The (recently passed) law provides $2,000 to $4,000 in AMT relief this year but drops the relief in 2005. So when the crunch really hits, the AMT will steal whatever tax relief many Americans think they’re getting."
Thus, as most always happens, middle-income taxpayers have been shafted yet again by much-ballyhooed--and allegedly conservative--tax legislation!
THE "DEATH TAX" REPEAL JOKE
The Economist, a magazine I have subscribed to for years, is typically a friend to sensible, non-confiscatory tax policy. With a fairly conservative bent (most of the time, anyhow) it can be expected to generally be a friend to the kinds of policies President Bush professes to believe in. Nevertheless, in their June 2 issue, the magazine referred to the claim that federal estate taxes were being repealed as "the biggest con of all" in a monstrosity of a bill.
In the near-term, the same thing happens with estate taxes as does that slated to occur with most other levies: the government’s bite is first lessened in the form of annual nibbles. Currently, the first $675,000 of a net estate (for an individual) which is exempted from the estate tax will slowly rise through 2010 to reach $3.5 million. The top estate tax rate will, at the same time, drop from 55% to 45% with the estate tax disappearing altogether—for one brief moment—in 2010.
Just as Bush agreed to with many other provisions of his bill, however, he accepted a "sunset clause" where the estate clause would be restored in 2011. As one pundit pointed out, "If your ailing mother dies on December 31, 2010, you inherit her estate tax free. If she dies the next day, half her estate could be taxed away." The president’s handlers lamely respond that they hope a future Congress and/or administration will make this "repeal" of the estate tax permanent. I wouldn’t hold my breath, however.
About the only good thing I can say about some related provisions of the bill is that—contrary to the fear others and I originally had—the new tax law does not repeal stepped up valuation immediately (I commented on this possibility back in my February issue.) Instead, the step-up rules are slated to be repealed in 2010, on taxable estates over $1.3 million. Still unclear to many is whether a scenario could develop where, in 2011, estates could conceivably be subject to both federal estate taxes and capital gains tax on appreciated assets.
The Bush Administration as well as congressional defenders of this god awful mess claim to hope that future lawmakers will use taxes on accumulated capital gains passed on at death as a substitute for estate taxes generally. Such capital gains taxes would apply only in such a way, hopefully, that will not result in the continued losses of small businesses, farms, etc. that we have seen with the current manifestation of the death tax.
In the end, this is one more provision of the recently passed law that fails the most fundamental test of a good tax bill. It is little easier--and arguably, it’s harder and more fraught with peril--for people to make plans now than it was before. In his desire to affix his signature to any lunacy that could be passed off as a "tax cut," President Bush has made matters worse than they were before.
DÉJÀ VU FOR THE BUSH FAMILY?
We all know that one of the main reasons why Bush the Elder was a one-term president is that violated a pledge not to raise taxes. As the federal deficit continued growing early in his administration--due largely to the effect of a recession’s onset--a divided Congress browbeat the president into raising taxes. Rather than challenge the very notion that taking even more money out of the private sector could alleviate the country’s troubles—and the deficit—Bush knuckled under. Conservatives who never completely trusted Bush Senior anyway were unforgiving.
The current President Bush, now facing a divided Congressional leadership as well, may just have set himself up for a similar fate.
As I wrote back in my January issue, the surplus figures being relied on by Bush and many lawmakers are part smoke-and-mirrors accounting, and part fantasy. Already, we are receiving news that—adding the new tax cuts, worthless as they are, to the mix—new surplus projections are being reduced drastically. A revised Congressional budget office estimate released June 26 now shows that projected surpluses for the next four fiscal years will collectively be a fraction of what was expected back in January. A fresh USA Today item suggest that the expected surplus could vanish all together even in this next fiscal year. Dismal corporate profits, other effects of the weakened economy, a "bipartisan spending binge" on the part of the Congress and more are to blame. Add all of this up and it’s an even bet that by the end of Bush’s first (and only?) term the federal budget could once again be in the red.
Particularly if the Democrats can win some seats in next year’s mid-term election--and even take back the House of Representatives as well--Bush will be under tremendous pressure to begin gutting even the "witch’s brew" recently passed. Some members of his own party, together with virtually all Democrats and the major establishment media, will be hollering, "I told you so" to anyone who will listen. They will blame Bush’s "irresponsible" tax cuts with immediately plunging the nation back into an era of deficit spending, just as America suffered under Ronald Reagan.
HAS THE "BIG GOVERNMENT CONSERVATIVE" ACTUALLY KILLED CHANCES FOR TAX REFORM?
For starters, anyone who would compare the objectives of Ronald Reagan with George W. Bush is sadly mistaken. The Gipper claimed to want to actually reduce the size and scope of government. Whether we want to blame him personally, the Congress of most of the 1980s, or both, those dreams were never realized. During his eight years in office, tax receipts to the federal government nearly doubled under a man who would be described by many as the "conservative of the century."
That fact is noteworthy for another reason that, unfortunately, has been buried under the history of that decade’s large operating federal deficits. After Reagan slashed income tax rates, revenues to the Treasury soared. While for any thinking person this vindicates the old "Laffer Curve" (where the number of dollars received by Washington goes up when tax rates are lowered), it didn’t matter in the end. The size of the annual federal budget had much more than doubled by the time Reagan left office, as even he was unable in the end to slow down the growth of the federal leviathan.
George W. Bush is starting from a position described--once again by The Economist--as a "big government conservative." Rather than advocating the reduction or elimination of government programs, as did Reagan, Bush instead seems to view government as a means by which conservatives can now control most aspects of everyday life. As one political pundit describes the situation, "Big government conservatism is the animating principal of the Bush presidency. It is a radical departure from the conservatism of the past 40 years." One can only imagine, given how much the federal government grew in its size and power under Reagan, what we have to look forward to under Bush’s "compassionate conservatism."
Some--even some conservatives--don’t seem to see a big problem with this. As is the case, sadly, with most men, there is a powerful urge to want to direct others’ lives in many ways. Such is the attitude that so many have; that they know what is best for us in most every area of life, and will make our lives better if they only had the power to do so (that is the demagogism that results from a democracy, as I explain on the last page.)
In signing on to this philosophy, whatever his good intentions, Bush may have doomed any future chances for genuine tax reform that truly limits government, and returns us to a more constitutional form of taxation. As I have already suggested, the odds are high that, in the next year or two, Bush will be forced to retreat from even the idea of tax reduction, as the factors affecting the federal budget solidify. The notion of real tax reform may never get off the ground. Sure--Bush’s lieutenants such as Larry Lindsey and Treasury Secretary Paul O’Neill have waxed eloquent in their assertions that the recent law was just a start--and that the administration intends to follow up with additional measures that will allegedly reduce the size of government and restore some kind of "freedom" to people’s lives financially. However, if future measures are anything like this last one, please guys--don’t do anything!
As Matthew Robinson wrote in the April 2 issue of Human Events, the weekly conservative newspaper, most of the provisions of Bush’s tax plan actually served to reinforce the progressive nature of the current tax code, in spite of Democrat claims that the bill was a gift to the wealthy. "According to date from the Treasury Department," he says, "those making $100,000 a year or more pay 70% of individual income taxes. After the Bush plan goes into effect they will pay 74.2%--making future debates about tax relief even more susceptible to the Democrats’ class-warfare arguments, which, in turn, will make future tax cuts even more difficult to pass."
Yes--we might still get a capital gains tax rate cut. Additionally, I expect there will be some targeted, broadly-supported tax breaks of various kinds for health care, energy, conservation and--lest we forget--the multitude of highly-targeted "gimmees" that always find their way into the IRS Code as a reward for campaign contributions. However, Bush may have signed the death warrant for such ideas as the Tauzin-Traficant
Bill, which would institute a national sales tax and repeal the income tax. How sad that a party which a few years ago seemed on the verge of ruling America for a generation or more may now be on the edge of a political abyss nationally, in great part because it refused to follow the ideals of the 1994 G.O.P. freshman class in the House of Representatives. Talk about snatching defeat from the jaws of victory; but then again, the G.O.P. has failed miserably in more areas than this as well.
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