January 7, 2002

January 7, 2002 | Commentary on Taxes

Tax Cuts: Now You See Them...

Some conservatives may be grumbling about the fact that Senate Majority Leader Tom Daschle single-handedly killed President Bush's plan to stimulate the flagging economy shortly before the Christmas recess. But they shouldn't.

The president had made so many compromises to try to get a bill through that stimulus legislation that began as red meat wound up as watery soup. Wasteful spending replaced supply-side tax cuts. Welfare-state policies replaced free-market principles. It was an economic plan that would have made America look a lot like France, with little growth and pervasive joblessness.

But thanks to Sen. Daschle, the Bush administration and pro-growth members of Congress have a chance to start anew and propose a package that will put people back to work and make America's economy more productive.

This stimulus package could include many of the same proposals the administration asked for last year. For instance, the president asked Congress to speed up implementation of the tax-rate reductions approved in June 2001. Congress should waste no time in doing so. After all, how does it help the economy today to hold off on tax-rate reductions until 2004?

It would be a mistake, however, for lawmakers to focus solely on short-run stimulus when a more pressing problem needs to be dealt with: Many of the tax-rate reductions approved last year, as well as some of the tax cuts now being considered as part of a stimulus package, are set be repealed in 2011 or sooner.

Indeed, these "built-in" tax increases lie in wait to ambush the economy in future years. And as we approach 2011, investors, entrepreneurs and small-business owners will be forced to lay off workers and reduce production.

Consider two examples. First, the cuts in personal income-tax rates disappear in 2011. This means taxpayers in the 25-percent tax bracket will be pushed to the 28-percent tax bracket. The tax rate on investors, entrepreneurs and small-business owners, meanwhile, will jump from 34 percent to nearly 40 percent. This can't help but discourage job creation and risk-taking by many of America's most productive citizens.

Second, consider repeal of the inheritance, or "death," tax. President Bush asked Congress to repeal this unfair version of double taxation (remember, the money was taxed when it was earned) not only to remove inequity in the tax code but to pursue sound economic policy. He knows that the economy suffers when families divert resources into tax shelters to avoid this punitive levy. By contrast, jobs are created and the economy grows when small-business owners seek to maximize income rather than minimize tax.

The good news is that Congress listened … sort of. The death tax is set to be phased out by 2010. But it returns in 2011. To be blunt, this makes no sense. How many investors and entrepreneurs will pull money out of tax shelters in the hope that politicians will re-enact death tax repeal in 2011? Almost none.

Not surprisingly, some politicians want to keep these automatic tax increases. They profess concern about future deficits, but this is a smoke screen. What they really want is more money to spend. Special-interest politics shouldn't be allowed to get in the way of tax cuts that will create private-sector jobs, and the politics of envy shouldn't be allowed to handcuff the economy.

Fortunately, the "us-versus-them" mentality that tax-cut opponents indulge in doesn't seem to work as well in the United States as it does in Europe. Most Americans realize that a vibrant, prosperous economy creates opportunity for people at all income levels, even those who don't earn enough to pay any tax.

So as important as it may be for Congress to speed up implementation of the Bush tax cut, it's actually far more important for them to peel off its expiration date, which threatens to do a host of long-term damage. To really help the economy, the cut needs to happen much sooner -- and it needs to be permanent.

Daniel Mitchell is the McKenna senior fellow in political economy at The Heritage Foundation, a Washington-based public policy research institute.

About the Author

Daniel J. Mitchell, Ph.D. McKenna Senior Fellow in Political Economy

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