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May 10, 2006
GOP Finally Agrees On Tax Cuts

With a roaring economy and 4.7% unemployment fueled by a recovery launched by George Bush's tax cuts, one would suppose that extending these reductions would be almost assumed in Congress, or at least by the Republicans that enacted them in the first place. However, in a measure of how rudderless the GOP caucus has become, party leaders finally reached an agreement on extending the cuts while Democrats objected to its costs:

House and Senate Republican negotiators reached a final agreement yesterday on a five-year, nearly $70 billion tax package that would extend President Bush's deep cuts to tax rates on dividends and capital gains, while sparing about 15 million middle-income Americans from the alternative minimum tax.

Republican leaders hope to pass the agreement swiftly. House consideration is scheduled for tonight, with the Senate likely to send the measure to the White House for the president's signature by the end of the week. But the package remains controversial, with GOP leaders saying it is essential to sustain a strong economic recovery and Democrats and a few Republicans saying the cuts would mainly benefit the wealthy and add to the long-term deficit.

"Keeping taxes low helps Americans find and keep work, supports families and communities with good job bases, and makes America a great place to do business for companies both here at home and those overseas looking for a place to invest," Senate Majority Leader Bill Frist (R-Tenn.) said in a statement.

But with the budget deficit still expected to exceed $300 billion this year, despite a strong economy, opponents say the government cannot afford to add $70 billion more over the next five years.

"The point is the preponderance of these revenues will go to upper-income people, people who make a million dollars or more," Sen. Olympia J. Snowe (R-Maine) said yesterday. "It's a question of priorities."

Snowe is one of the Republicans that held up the tax extensions for as long as possible, preferring to raise taxes rather than cut the budget -- which is also a matter of priorities. However, if Snowe really worries about tax revenues rather than the appearance of the tax cuts, then she would realize that the combination of investment in American business and jobs that the cuts provided has actually increased federal tax receipts far beyond the static cost of the cuts themselves. More people have jobs and therefore pay taxes; more goods get sold and purchased, also increasing tax receipts.

That is true even in the dividend and investment cuts that Snowe and the Democrats find most objectionable. Dr. Daniel Mitchell at the Heritage Foundation notes that federal tax receipts overall climbed 14.5% last year and 9% the year before that, far outstripping inflation, but did even better in the investment categories:

Revenues have been pouring into the Treasury at record rates. In the last 12 months, tax receipts have skyrocketed 14.5 percent, more than four times faster than inflation. And in the previous 12 months, they jumped nearly nine percent, almost three times faster than inflation.

It is especially worth noting that the government is collecting more money from capital gains taxes and dividend taxes. As the Wall Street Journal noted, “…capital gains receipts from 2002-04 have climbed by 79% after the reduction in the tax rate from 20% to 15%. Dividend tax receipts are up 35% from 2002 to 2004, even though the taxable rate fell from 39.6% to 15%.

Dr. Mitchell notes that rational tax policy should aim to increase tax receipts and not focus on jacking up the rates as a vehicle for doing so. In the first place, it makes an assumption that the government owns the money that it taxes rather than the individuals doing the investing. Secondly, taxation provides a negative influence on behavior; as taxes rise on a particular channel, people will direct their money elsewhere. The best way to get more revenue from taxes is to expand the tax base, and that has been the result of these tax cuts.

That does not make the concern over budget deficits misplaced, but the villain in deficits has not been the tax cuts. It has been the unbridled spending spree that the GOP and this administration has indulged for the past six years. Federal spending has risen faster than inflation in every major category since the GOP has controlled Washington. Putting entitlement spending to one side for the moment, discretionary spending has gone up 39% over the past three years while inflation has accounted for about 9% during the same period. If the federal budget cannot keep up with the expanding tax base and increasing revenue flowing into its coffers, the last solution we need is to take more money away from taxpayers to feed the beast. That solution is akin to giving an addict more fixes in order to put off the pain.

Unfortunately, the pain cannot be put off any longer. We are long overdue for a rethinking of the role of the federal government and a drastic reduction in its reach. Not only has the welfare state become far too expensive, but it also continues to fuel corruption and bribery as politicians get more and more money and power to manipulate. We thought that we would get that kind of paradigm challenge when we elected a GOP Congress and a Republican President to match. Unfortunately, the Republicans have squandered their opportunity and now face defeat at the hands of the Democrats, who at least argue in good faith for a larger and more powerful central government.

Mark Tapscott has more thoughts on this -- and Republicans should heed his words.

Sphere It Digg! View blog reactions
Posted by Ed Morrissey at May 10, 2006 5:34 AM

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