Congress Tax Cut Bills Move Ahead

The fiscal irresponsibility of the American government persists; this is what happens when lawyers are the legislators and not economists. As they try to rush through work that should have been completed some time ago in advance of the Thanksgiving holiday and recess, members of the House and the Senate have slashed taxes again. This will mean a poorer and weaker American two generations from now, when the current Congress is safely six feet under.

On the Senate side of the Capitol, the Senators cut some $60 billion in taxes on a 64-33 vote. There is some good news in this, though. The oil industry will have to cough up $5 billion more in taxes thanks to a change in the way oil stockpiles are valued, and they will lose $1 billion in exploration tax breaks Mr. Bush signed into law a few months ago. Of course, that is less than the profits of just Exxon Mobile in the last quarter.

On the downside, there is a $30 billion break for those facing the alternative minimum tax. Since the threshold for this tax, which ensures every American pays something toward funding the Republic, hasn’t been indexed since it was created in 1969, lots of people pay this tax. The solution is indexation, not one-off bribes to the well-off, which the Senate has just done. Throw in $7 billion in tax relief for hurricane rebuilding rather than bond-funding of the projects, and one has a pretty muddleheaded bill.

Yet it looks positively brilliant compared to the House version, which passed 217-215 with 14 Republicans voting “nay.” Once again, the Republican mantra of “dividends good, wages bad” is put into action. The current rate of taxation on dividends and capital gains (neither of which the working poor have) is 15%, lowered by the GOP and Mr. Bush in 2003. It is set to rise to 20% in 2008, but the House wants to extend the lower rate through 2010. Their argument is that it will boost economic growth. And that would be great, but the Fed is raising interest rates to cool the economy. GOP fiscal policy negates the Fed’s monetary policy here. One might also mention the $12 billion in Medicaid funding and $14 billion in student loans that the House has cut.

WWJD? What would John [Maynard Keynes] do? He would note that GDP growth in the US is pushing 4% per annum, that the central bank is tightening to prevent an outbreak of inflation, and that employment appears acceptable if not strong. He would note that the federal budget deficit is large and structural, and that the dollar has strengthened in recent months. He would also note that the country is at war and that huge expenses are being incurred off the books. Higher taxes would solve most of these problems while not making the others any worse. Tax cuts at this stage are exactly the wrong prescription. Undoubtedly when the two versions are reconciled in conference committee, the worst of both will be retained.

© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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