Wall Street Journal Editorial on Tax Gimmicks is Right (and Left) On

A Rare Case of the WSJ Getting it Correct

This Forum has early and often criticized the editorial and opinion pieces in the Wall Street Journal for their lack of truthfulness, logic and recognition of reality.  So it is only fair to commend them when an editorial is spot on, when it does correctly comment on an issue in an intelligent and forthright manner.

The issue in this editorial are the two tax ‘gimmicks’ traveling through the Congress on their way to legislative oblivion.  One is the so-called ‘Buffet Rule’ which Democrats support which would require very wealthy individual to pay a tax rate of at least 30%.  The WSJ correctly identifies this as tax gimmickry (Yes, Virginia, Democrats like Republicans engage in political gimmicks, you just don’t hear as much about it because the Republicans are so much better at it).

Senate Democrats lost their latest attempt at tax flim-flam on Monday when their 30% minimum tax (the Buffett rule) went down to easy defeat. 

But the WSJ really trains its fire on a Republican plan for a temporary tax decrease for businesses with less than 500 employees.

The real problem with the GOP's Small Business Tax Cut Act is that it is targeted and temporary. Why provide a tax cut only to companies with 500 or fewer employees? Large employers are as burdened as small companies by the U.S. tax code, especially companies paying the 35% corporate rate. Yet these corporations also have some of the most cash on hand to invest in the U.S., and they might do so if tax rates weren't so punitive.

The 500-employee cutoff is arbitrary and political—a ploy to let Republicans say they aren't cutting taxes for big business. But in practice they are playing economic favorites as much as Democrats do. Their proposal would lead to malinvestment and other economic distortions as companies contorted themselves to qualify for the lower tax rates. The marginal tax increase on hiring the 501st worker would be severe.

This brings out the huge folly in bi-partisan U. S. tax policy, the fact that the policy has become temporary tax provision and not permanent rules.  Within limits, it is far more important for an economy to have known, fixed, constant and relatively non-complex tax regimes than lower tax rates.  Individuals and business can plan, invest and spend with confidence once they know what the tax rules are and that those rules are not subject to short term arbitrary changes. 

The U.S. system today is just the opposite, the result being no one knows what taxes will be in 2013, much less for the rest of the decade.  In fact with a huge number of temporary tax provisions expiring at the end of 2012 it is amazing that the economic activity in the U. S. is as good as it is given the level of uncertainty about future tax rates and provisions.

The Wall Street Journal editorials are right to condemn the Democratic tax posturing, and that is expected.  But it is unusual that they also recognize the same problem with Republicans, so here is a rare but earned salute to the editors in the hope, but not the expectation, that such writing will continue into the future.