Politics and Common Sense - Rarely Compatible

Recently, my wife, after reading my post on the problems with the stimulus bill, said “Why don’t you talk more about there not being enough tax incentives in the bill. The average person doesn’t know anything about corporate or capital gains taxes”. I thought that was a reasonable request.

My problem with the stimulus bill is that although 35% of the bill contains some form of tax credits (not cuts), corporate or capital gains taxes are not addressed. These taxes are the ones that most influence the profitability and investment environment of our industrial base. As a result, they impact Wall Street’s view of the future, jobs, and consumer confidence. Why they were not addressed in this bill is strictly political and makes no economic sense.

Corporate Tax Rate
• Since the 1980’s corporate tax rates have been in a free fall, that is, everywhere except the U.S. On average, the top corporate rate in industrialized nations has gone from 50% to an average of 29%, according to the CATO Institute. In a global economy, competition is compelling governments to dramatically lower corporate tax rates. The U.S. is 2nd to Japan, but when you include state taxes, we have by far the highest corporate tax rate among all 33 industrialized nations in the world. Since 2000 our rate is unchanged, while virtually all other nations have dropped considerably (according to the Tax Foundation). A measurable drop in our tax rate would result in a marked rebound in our stock market, an impetus for corporate investment, and a surge in net profits. Wouldn’t that drive jobs and consumer spending?
Democrats fret over the “cost” of such a cut. However, compared to the trillion dollar spending package they just past, the effect on government revenues would be chump change. The increased corporate revenue gains from repatriated earnings, expanded production, increased income tax revenue, and lower unemployment costs, will more than offset any reduction in tax revenues going to the government.

Capital Gains Tax
• Another enigma is the reluctance to reduce capital gains taxes. Some 100 million Americans own stock, most are middle-class people. Obviously, most people will not realize capital gains on stock and in 401k’s this year, but under normal conditions a cut in capital gains tax always leads to increased revenues for the government rather than the reverse. Clinton dropped the tax to 20% in 1997 and Bush to 15% in 2002 and demonstrated this.
Most Democrats believe that a tax on investment income only affects the rich. The IRS tells us differently. In 2005, 47% of all tax returns reporting capital gains were from households with incomes below $50,000, and 79% from households with incomes below $100,000. Since this would be a middle-class tax cut, why do most Democrats oppose it? I thought that Republicans were the party of the rich. This is a stereotype that has existed for decades, but the facts don’t always bear that out.

So we risk spending 2 trillion dollars, when cuts in corporate and capital gains taxes can achieve the same result without the associated risk. That’s why politics and common sense are rarely compatible.