Tax breaks hard to take

Published: December 14, 2005

U.S. cannot afford Congress' irresponsible insistence on extending tax cuts to financially secure households

In its final days in session, Congress seems determined to play Santa Claus, rushing to pass out billions of dollars in tax cuts to recipients who in most cases don't need them. Its generosity is particularly troubling given the government's financial situation - last month alone, the federal deficit totaled $83.1 billion, the highest ever recorded in November.

Those huge deficits are already projected to continue through fiscal 2011 at least, thanks to past tax cuts, the cost of rebuilding the Gulf Coast, the continuing war on terrorism and the growing cost of entitlement programs such as Medicare.

But rather than act prudently in the face of such red ink, the House and Senate have approved tax cut plans that vary from the merely spendthrift to the shamelessly excessive.

The House has passed a $56 billion bill that extends lower tax rates on dividends and capital gains for another two years, through 2010. More than 70 percent of those tax benefits will go to households with annual incomes of more than $200,000, according to the Tax Policy Center, a think tank operated by the Urban Institute and the Brookings Institution. Million-dollar-income families would get about 40 percent of the tax break.

The House also approved $30 billion in one-year relief from the alternative minimum tax, which affects more taxpayers each year. Again, the bulk of the tax break would fall to the financially comfortable. Households with incomes of $100,000 or more a year would receive more than 80 percent of the benefit, according to the Center on Budget and Policy Priorities, another Washington think tank.

The Senate proposes $58 billion in tax relief, mostly to limit the impact of the alternative minimum tax. And while its version does not extend tax breaks on capital gains and dividends, that could change.

Senate Majority Leader Bill Frist (R-Tenn.) said Tuesday that his goal is to pass the dividend and capital gains extension this year, putting off action on the alternative minimum tax until 2006. (That action would no doubt be timed right before next year's off-year elections, allowing Congress to play hero to the upper-middle-class voters increasingly affected by the tax.)

Frist and others claim that continued cuts in capital gains taxes are necessary to keep the economy growing, but there is little evidence to support that view. The Tax Policy Center has compared changes in the gross domestic product with capital gains tax rates over the last 50 years and found no correlation. The center also noted that the dividend tax rate has no bearing on the decisions of major stock market investors - such as pension funds - that aren't taxed.

November's high deficit number included almost $23 billion in interest payments on previous debt, which totals more than $8 trillion. Each additional dollar of debt means more money has to be diverted to cover interest payments, leaving less to provide the services for which citizens pay taxes.

In other words, somebody ultimately pays the bill, even for Santa's tax-break "gifts."