Afraid of Commitment?
Why are politicians afraid of commitment?
I’m talking public policy, not personal lives. In particular, why don’t elected officials want to commit to permanent tax relief?
Politicians show very little hesitancy when it comes to wedding taxpayer dollars to bigger government. And make no mistake, this commitment to more and more spending is a bipartisan affair.
Just consider that Republicans have been running much of the fiscal show in recent years, and yet, total federal outlays will have increased by an annual average rate of 7.5 percent during FY2002 through FY2004. And guess what – that’s not all defense spending. Factor out defense and net interest, and spending on non-defense programs will rise by an annual average rate of 8.1 percent over the same time frame. That’s a frighteningly rapid pace of government expansion.
Indeed, it’s hard to find any politicians willing to break the bonds they’ve formed with big government. Do any Democrats or Republicans seriously talk about cutting spending or programs any more? Instead, it seems they just keep dreaming up new ways to waste taxpayers’ money.
In sharp contrast, the pro-growth tax relief measures passed in 2001 and 2003 are temporary. For example, the reduction in personal income tax rates expires after 2010, with the top rate increasing from 35% to 39.6% in 2011. The death tax dies in 2010, but then is resurrected in 2011 with a top rate of 60%. In 2009, the top capital gains tax rate on individuals increases from 15% to 20%, and the highest rate on dividend income rises from 15% to 39.6%.
In 2006, the small business expensing level of $100,000 implemented in 2003 (and indexed for inflation) declines to $25,000 in 2006. The threshold level at which the expensing amount gets phased down drops from $400,000 to $200,000 in 2006 as well.
Like spouses with wandering eyes, our elected officials apparently want to keep their options open when it comes to tax relief.
There was some good news in July as the U.S. House of Representatives voted by 424-0 to extend the small business expensing provisions through 2007. The Senate has yet to take up the measure. Let’s hope they have the common sense to pass it. This expensing provision provides incentives to make the investments necessary to expand businesses and create jobs.
At the same time, though, a temporary extension of temporary tax cuts is not exactly the ideal way to make tax policy.
Investors and entrepreneurs need to know that tax relief is permanent in order to have the confidence to move ahead with plans for starting up and expanding businesses.
Most tax cuts help the economy. In particular, tax relief measures that enhance incentives for working, saving, investing and entrepreneurship accomplish the most in boosting the economy over both the short term and the long haul. So, cutting personal income, capital gains, dividend and estate taxes makes sense, as does providing expensing options for business investment. But making such cuts temporary saps some of the economic energy from tax relief.
Our elected officials have to decide where their hearts truly lie. What are they really committed to in the end – ever-bigger government or substantive, permanent tax relief? Eventually, today’s policy bigamy will have to come to an end, and a choice made.
Raymond J. Keating serves as chief economist for the Small Business Survival Committee.
