Tax Cuts, R.I.P.

Posted: Sep 23, 2002 12:00 AM
Apparently forgetting the bruising electoral battles ahead in the struggle for control of Congress, Office of Management and Budget Director Mitch Daniels Wednesday dashed hopes for more tax cuts before politicians skip town in less than a month. Citing the costly, almost-certain war in Iraq, Daniels announced that the White House would not promote any new tax cuts before November--although his office suggests that his remarks were not intended to undermine modest measures currently on the table in Congress. With investor confidence tanking, many Congressional Republicans are itching for a tax cut package tailored specifically for investors, who make up the solid majority of the electorate and now outnumber jobholders, according to a new poll by Democrat pollster Mark Penn. The White House also had tax cut fever back in August--but Daniels' comments likely signal that Iraq is becoming the administration's all-consuming focus. For a whole host of reasons--the War on Terror, the escalating debate over Iraq, and the new Homeland Security department--tax cuts aimed at investors have not yet managed to gain traction. The best solution from a policy and political standpoint--slashing the rate for capital gains taxes--has not even been raised as a goal by either the White House or Congressional Republicans. Some Republican lobbyists and Congressional staffers suspect Bush might be holding out for a popular investor tax cut package until he's on the ballot in two years--but that rationale doesn't apply to Congress. GOP staffers at the House Ways and Means Committee, the panel responsible for all tax legislation, justify the lack of movement by expressing doubt that any cap gains rate cut could pass the full House before the election. But such pessimism overlooks the obvious appeal for a Democrat or moderate Republican in a tough race to pose as a friend of investors by supporting a rate cut. Regardless of prospects for a cut in the cap gains tax rate in the House, Tom Daschle and Bob Byrd would never let it see the light of day in the other chamber. Even though it would never make it to a vote in the Senate, the Republican House passing a rate cut would bolster the GOP's standing among ordinary investors--and possibly knock the Senate out of Democratic hands. In the absence of meaningful reforms, House Majority Leader Dick Armey (R-TX) is putting his weight behind two small, but politically appealing, proposals to provide some much-needed relief to beaten-down investors: 1) changing the maximum age for participation in 401(k)s and IRAs, and 2) doubling the maximum capital loss deduction--the amount in losses people can claim on their tax forms--from $3,000 to $6,000. Current law mandates that people exit 401(k)s and IRAs at age 70 and 1/2, meaning that many seniors near that age will not have a full opportunity to recoup their losses before being booted from tax-protected accounts. Aside from harming the segment of voters with the highest turnout, this law reduces the attractiveness of investing--and it doesn't take an economist to understand the result of that. Doubling the capital loss deduction wouldn't have as much of a direct impact on investment levels, but it would address a question of fundamental fairness. "The government taxes investors 20 percent of all profits, yet only shares $3,000 in loses," notes Daniel Clifton, economist at Americans for Tax Reform (ATR). But standing in the way of Armey's mini-measures is House Ways and Means Chairman Bill Thomas, who questions both their stimulative effect and political viability. Although Thomas has done some good this term, he "could be doing a lot more to help," complains one veteran Republican lobbyist. Thomas is a tax-cutter at heart, but he's decided that at this late stage in the fall, it has to be a big tax cut, or none at all. In the current environment, that means none at all. Whatever the policy merits of Armey's two proposals, the political appeal is undeniable. In an off-year election, the senior vote is crucial, and Republicans would have an issue with a huge sweet spot to campaign on if they vote to lift the age restriction. The capital loss provision would be even more far-reaching. As one senior Republican Congressional staffer quipped, "Even janitors have lost more than $3,000 in this market." But Thomas has a philosophical objection to raising the capital loss deduction, asking rhetorically, "At what point do we hold people responsible for their own decisions?"--to which ATR president Grover Norquist responds, "Why should you pay taxes on money you don't have?" Tax cuts may be receiving their last rites for this Congress, but the next session could be more promising--it all depends on who controls Congress after the votes are tallied. And in the new political reality where more voters own stocks than hold jobs, who controls the next Congress could hinge on the GOP's ability to cut taxes for investors before November.