January 28, 2010

The Tax Suspense Is Killing Us

This op-ed was published online at the Anchorage Daily Planet on January 27, 2010.

Will tax rates on wages jump at the end of the year? Working minds want to know. But so far we only have rumors that President Obama is considering an extension of all the Bush tax cuts.

Will tax rates on capital gains and dividends jump at the end of the year? Investing minds want to know, but there’s no certainty about that either.

Will the U.S. have an estate tax in 2010? What about 2011 and beyond? Elderly people and desperate executors want to know, but Congress can’t make up its mind.

Will the small corporate tax rate cuts promoted by Congressman Rangel and Senator Kerry, or the big one supported by manufacturers, gain the support of the Administration? Another question mark.

And of course the biggest uncertainty is still the health insurance reform bill. One sixth of the economy has braced for a wave of new taxes on wages, capital gains, dividends, medical devices, drugs and insurance, but suddenly the wave might not hit the beach. But it still might.

These are the key tax questions that need a definitive presidential answer, answers that will tell investors where they can prudently put their money. But if the leaks about the State of the Union address are true, President Obama will instead dish out a heaping helping of unhelpful “job credits” and other tax-related distractions.

For all the important questions, the ones that are really plaguing the economy, he’ll punt to a commission. Yes, yet another commission that will supposedly make the hard decisions for him—but not until after the 2010 elections. That leaves the president to talk all year about new and improved tax credits which do nothing for the national economy but make such good talking points for a speech.

A bigger child and dependent care tax credit will cheer the daycare industry and provide perfect fodder for the president to sympathize with working mothers and their children. A bigger “savers credit” will be applauded by investment firms who handle 401(k) accounts, and there will be feel-good talk about family businesses. But neither of those will remove any tax uncertainty.

Especially discouraging is the president’s decision to recycle the “job credit” idea that his own congress rejected last spring. That’s the $3,000 he wants to pay companies for each “job created,” a concept mocked by the recent, fanciful tallies of jobs “created or saved.” As even his champions are pointing out, there’s no way to tell which jobs deserve the subsidy. Firms that deferred capital spending or cut back hours during the recession to avoid firing people will get nothing during the recovery, but firms that laid all their people off first will get big checks from Uncle Sam when they start hiring again. And of course, new firms and firms that would have grown anyway will reap big rewards.

These tax credits are really quite similar to pork barrel spending, but instead of the appropriations committees cutting checks, the money is run through the tax system.

Fortunately, public concern over the deficit has reached such a peak that the president’s pre-leaked tax ideas are not budget-busters, and he will even throw in a spending freeze on a small part of the budget, a McCain idea that Obama had mocked during the campaign.

Thank goodness the president hasn’t issued any foolish promises to “take millions off the tax rolls.” That old chestnut was beloved of Republican presidents who frequently designed their tax cuts to wipe out the tax liability of people who were just paying a few hundred dollars a year anyway. That would take them off the rolls, but as a result we’re left with millions of “nonpayers” who when they file their tax returns get every dollar back that was withheld from their paychecks during the year. Over a third of all tax returns filed now pay nothing, and the people who actually pay federal income taxes must shoulder a bigger share of the federal government’s rapidly growing budget.

None of President Obama’s tax credits, whether new or improved, tell us what we need to know. What is the fate of the tax code’s most important rates? The suspense is killing us.