Wednesday, November 02, 2005

Baselines

Since this is the inaugural effort, let's not waste time in petty nitpicking. When today's lead editorial ("Big Mack Tax Reform") observes that the President's tax reform commission has proposed to raise to $20,000 the limit on annual IRA contributions and claims that the proposal "nearly quadruples the amount of annual tax free savings for middle-income families," I might point out that median family income last year was $44,389. This would leave a little less room than the Journal suggests for middle-income families to "nearly quadruple" their savings to $20,000 per year.

The editors tell us that Congress opened a one-year window last year allowing businesses to expense (that is, deduct) capital expenditures in the year they were made rather than depreciating the assets over several years. When they say that this led to "a surge in business spending for plant, equipment and technology purchases," I might ask what they expect to happen to capital expenditures when Congress passes a one-year-only tax holiday for capital expenditures. If Congress passed a one-year-only law exempting any newspaper with hedcuts (those elegant, pixillated drawings that are the Journal's substitute for photos) from federal tax, the Journal might be joined by a temporary flood of hedcut-imitators, but this would tell us nothing worth knowing about tax reform.

And I might note in passing that the editors' mask of good-government earnestness slips a bit when they advocate using the repeal of the AMT as a club with which to beat Democrats. After all, they charmingly suggest, "their [Democrats'] voters in high-tax states are the AMT's biggest victims."

But that would be petty, and we'll have plenty of time for pettiness in the days to come. Let's instead focus on the editorial's waspish complaint that "President Bush insisted that Mr. Mack and his friends propose a 'revenue neutral' reform." The Journal of course seizes the opportunity to complain about the vast revenue increases that will go unrealized unless taxes are cut as part of this process. But the important point here is not this supply-side insanity (that is after all standard fare on the Journal editorial page) but the sleight-of-hand involved in getting there. The President did indeed call for "revenue neutral" reform, but he (and the Journal) define the term in a decidedly eccentric way. Ordinarily, a "revenue neutral" change to the tax code would leave revenue at the same level as projected under current law. The President and the Journal, on the other hand, treat the baseline revenue as the amount of money that would be collected if the President's upper-bracket tax cuts were made permanent.

Doing so would be wildly reckless, of course, since the country already faces massive deficits under current law, without making permanent tax cuts that were originally presented as a readily-affordable plan for short-term economic stimulus. So, needless to say, this is a cornerstone of the President's, and the Journal's, economic plan for the future. The Journal is obviously free to argue for as reckless a tax cut as it likes, and it surely will. But even minimal intellectual honesty ought to lead the editors to refrain from peddling the illusion that this highly controversial change has already been agreed upon, and tossing off the suggestion as a pretended aside. The Journal to the contrary, Connie Mack and his commission have produced nothing close to a "revenue neutral" tax plan.