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December 13, 2010

A Misdeal on Tax Cuts

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As tax-cut deals go, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was never a winner.

In fact, it had only one thing in its favor: extending the 2001 and 2003 tax cuts, which are set to expire at the end of this month. Tax relief, of course, is just what our struggling economy needs - now. As President Obama said, it would be "a grave injustice" to let taxes go back up. Such an increase would be "a chilling prospect for the American people."

Unfortunately, the tax-cut deal has deteriorated since it was announced, as congressional liberals have loaded it with special-interest provisions and vowed still to raise taxes on the hated "rich." It has morphed from an agreement that conservatives could begrudgingly accept to an unholy mess that no one who cares about America's financial health can support.

Even a clean deal that offered temporary tax relief would be no great shake. Better than nothing? Sure. But extending it for just two years would mean that 1) we'd likely be back here in just 24 months, engaging in the usual political horse trading while the productive sector of our economy held its breath, and 2) the atmosphere of uncertainly would continue to cloud our economy.

Businesses in a free society need one thing above everything else if they're to thrive: certainty. If they don't know whether taxes are going up in the near future, they hedge their bets. They delay buying new equipment. They hire fewer people. It's bad enough when a few businesses do it. But multiplied across the sprawling American economy, this trend drags us down. Unemployment stays high, investment dries up. Recovery remains elusive.

Consider the rest of this deal, however - and see how the drawbacks pile up.

Lawmakers included a two-year patch of the Alternative Minimum Tax (AMT). They should just repeal it altogether. This is long overdue. The AMT was enacted in 1969 to keep a select group of very wealthy people from paying no tax whatsoever. Yet it never was indexed to inflation. So over the years, its reach has expanded further and further down the income chain. Now we've reached the point where it's snagging many people who are nowhere near being millionaires and forcing them to pay a higher rate. We need to fix this for good, not for just a little while.

Consider, too, what the deal would do to the death tax. Under current law, the tax has been lowered gradually until it hit zero percent this year. After Dec. 31, though, it pops back up to 55 percent. With the tax-cut deal, the death tax still would be, ahem, resuscitated, but up to 35 percent instead, and certain other exemptions would be carved out. This doesn't give the relief that small businesses, farms and others need - the kind of relief they'd get from a permanent repeal of the death tax. It's time to kill it once and for all.

Making matters worse, the tax-cut deal contains a variety of measures that simply have no place in a tax bill. Let's see: Section 709 provides for an "energy-efficient appliance credit." In Section 701, it's "incentives for biodiesel and renewable diesel." In Section 744, it's "special expensing rules for certain film and television productions." The list goes on. Whose Christmas tree is getting trimmed at taxpayer expense - and why?

Finally, the tax-cut deal provides a costly extension of unemployment insurance. How will it be paid for? The deal doesn't say.

The tax-cut deal, as it stands, will add to our already disastrous long-term fiscal problem by adding billions more in spending. None of it belongs in a "tax bill." And while the deal represents progress, we're still straying far from the kind of tax relief needed to light a real fire under the rocket that is the American economy.

We need a straight up-or-down vote on full extension, including the AMT. Come on, Congress. Stop playing chicken with America's future.

Ed Feulner is president of the Heritage Foundation.

First appeared in The Washington Times

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