Are Democrats Warming Up to Republican-Style Tax Cuts?

Are Democrats Warming Up to Republican-Style Tax Cuts?

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It’s hardly the Senate’s moment of glory, but Democrats shut down a GOP filibuster on Tuesday and cleared the way for passing a bill  to buck up small business.

The Senate,  in a 61 to 37 vote,  approved a motion to limit debate  after two  Republicans – George Voinovich of Ohio and George LeMieux of Florida – went along with Democrats.  That ended more than a month of partisan gridlock.

In a normal world, this bill would have sailed to passage without a hiccup.  The bill would provide small companies, which are still bogged down in a recession-like gloom, with new tax breaks and a new $30 billion lending fund.  The costs are all offset by closing down other tax breaks, including a big one for the oil industry, so it would not increase the deficit.

But this is not a normal world, and nothing passes the Senate without a pitched battle.But we know that already. There is another story here that has been largely overlooked: President Obama and Hill Democrats are warming up to Republican-style tax breaks for business.

The small-business bill  would eliminate capital gains taxes on up to $10 million in profits on small-business investments.  That’s a big incentive for investors and a big windfall for owners who sell out. Some would argue that it’s too generous, because its benefits would flow to people who are almost by definition millionaires. 

There’s a bigger pattern here. A key element in Obama’s new economic proposals would let corporations immediately write off 100 percent of their investment in plant and equipment. This would be a permanent change, and would encourage companies to invest sooner rather than later.  Besides permanently extending the R&D tax credit, the change would go a long way toward excluding a great deal of corporate income from taxes.  It’s an idea that many Republican economists have championed for years.

Are these good ideas?  At a time like this, when many small companies can’t get bank financing and when corporations are sitting on the sidelines with vast amounts of idle cash, many analysts say they make a lot of sense.  And over the long-haul, there are valid arguments for reducing or eliminating the “double-taxation’’ on corporate profits (first through the corporate tax, then through dividend taxes)

But there are issues.  Reducing taxes on corporate profit disproportionately benefits people at the highest income levels.  Likewise, the tax-free windfall to small business owners would probably provide outsized benefits to people at the top end.  Being a small-business owner doesn’t mean you have a small income – especially when you are selling that business for enough money to spend the rest of your life in Tahiti.  

None of these results is necessarily bad, because spurring investment is an important goal of public policy.  But if that’s the way Congress wants to go, lawmakers should also start pushing for a broader overhaul and clean-up of the entire tax code.  If they don’t, middle-income taxpayers could end up with a bigger share of the tax burden and a smaller share of the benefits.

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