Wednesday, September 8, 2004

An interesting Wall Street Journal editorial, Tax Cut Jujitsu, advocates, for political reasons, passage of the Democrats’ proposal to extend the expiring child tax credit, marriage-penalty relief, and the 10% tax bracket for two years, rather than the five years proposed by President Bush and the Republicans. The WSJ fears that a five-year extension would foreclose efforts to extend other expiring provisions like the 35% top bracket and the 15% capital gains and dividends rate. Here is the conclusion:

[I]it is probably better that all of the Bush tax cuts be considered for extension at the same time in the next Presidential term. As an economic matter, we think tax credits do far less good than do cuts in marginal income-tax rates. But they do serve a useful political purpose if they are the grease that helps get marginal-rate cuts passed into law.

The case for a two-year extension is even stronger if Mr. Bush is serious about his New York convention-speech promise to fight for tax reform in a second term. The array of current tax credits is one reason the tax code is so complicated. A serious tax reform will also mean trading a broader tax base (that is, fewer tax credits and deductions) for lower tax rates, so a five-year extension runs the risk of enlarging the pool of voters who fret that any tax reform would mean a net tax increase for them. This would only make it harder to build a political coalition for reform.

A two-year tax credit extension will mean no new tax increase for middle-class taxpayers through the election. But better than a five-year extension, it would also allow the most policy and political flexibility going into the tax battles of 2005. This looks like reason enough for the White House to rethink its insistence on a five-year plan.