Tax-cut politics live in strange places

Pete Sepp President, National Taxpayers Union
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The lame-duck Congress has been marked by many competing issues, but none as prominent as whether to renew the 2001 and 2003 taxpayer relief laws. Lawmakers, wary of another difficult election two years from now, have wisely made the tax rate extension a top priority. Runaway deficit spending clearly galvanized voters and adding a tax hike on January 1st, with unemployment still at 10 percent, would send another wave of enmity toward Washington.

One aspect of the debate riddled with misperceptions is the continuation of current tax rates for upper-income levels. Politically opportunistic lawmakers have adamantly opposed any rate extension to these Americans, on the grounds that “the rich don’t need it.” Their rhetoric reeks of class warfare, much like the underlying sentiment in this administration’s war against the oil and gas industry.

Despite assurances of energy “independence” and “security,” the administration and its allies in Congress continue to brainstorm over targeting the industry with punitive taxation to offset exorbitant spending in other areas. Just last week, the administration implemented a seven-year drilling moratorium for the entire East Coast as well as the eastern part of the Gulf of Mexico. In staking out such a radical position, the administration actually dealt a severe blow to workers it purports to protect, as this moratorium will inevitably lead to fewer jobs in an industry that employs or supports nine million Americans. We’ve all heard it before — Big Oil and its monstrous profits are robbing Middle America. And now, we’re hearing it again in this tax debate — that hardworking American job creators should be punished for their success.

Failing to extend all tax rates would damage our entire economy — a risk we cannot afford given the recent financial crisis. As a National Federation of Independent Business survey indicated, companies of between 20 and 250 employees could likely find themselves in the crosshairs of any “targeted” attempt to raise rates on the top two income tax brackets (since they often pay taxes on their profits using the 1040 return). Meanwhile, Census Bureau statistics show that companies employing between 20 and 299 people directly employ about 1 in 4 Americans (and help provide work to contractors in lower brackets). Higher taxes will shrink, not grow, job rolls in this critical small- to mid-sized business sector. As a letter from the National Taxpayers Union signed by over 300 economists (including a Nobel Laureate) noted, boosting taxes, for anyone, would be an “anti-stimulus” that would worsen our current challenges.

An imperfect compromise this week between the White House and congressional leaders will avert this worst-case scenario with a two-year continuation of all current rates. While a permanent extension would be far better, a two-year continuation will definitely help to keep business and investor confidence from tanking. On the other hand, the package also boosts federal outlays in the form of extended unemployment benefits and some “refundable” tax credits. Unless elected officials cut expenditures elsewhere, halt the federal borrowing binge, and resist the temptation to devour more of the economy with other taxes, the deficit spending on the benefit and refundable credit programs could very well compound joblessness in the future.

Assuming this pact survives, it will be up to the next Congress to deliver more policies that stimulate job growth. President Obama, who deserves credit for resisting the more radical elements of his party, can continue to help too. This includes serious spending restraint and systemic pro-growth tax reform. It also requires abandoning schemes that single out successful industries and individuals but ultimately punish those whose jobs they support.

When it comes to fiscal policies that will get America’s economy moving again, the current Congress could do a lot worse, and the next Congress must do a lot better.

Pete Sepp is Executive Vice President for the 262,000-member National Taxpayers Union (