How to cut taxes yet cost consumers in the same bill

My hand seems much better today, after my stupidity yesterday, good enough to type mostly normally. My friend and I never did get to Chelsea Piers last night, partially because we were in suits and dress shoes and not more suitable clothes, and he didn't want to aggravate my hand -- or was he afraid I'd lose my grip and send the club flying? We did go to Madison Square Park where, he's right, the Shake Shack serves a very, very good hamburger. At $7 for just a double cheeseburger (no fries or drink), it's more expensive than the fast food joints across the street, but there was no comparison in taste. To quote one of my favorite actors: "Mmhmm! This is a tasty burger!" (Go here for that sound clip and many others.)

That being said, here's something I'm surprised wasn't blogged about more yesterday. To mildly paraphrase Thomas Jefferson, were Congress to direct a marathon, runners would run backwards on moving sidewalks. Only in Washington, D.C, could a bill effectively nullify itself.

Senate Passes $60 Billion Tax Bill
Senate Passes $60 Billion Tax Bill Extending Tax Cuts, Raises Taxes on Oil Companies

WASHINGTON - The Senate passed a $60 billion bill early Friday that would extend expiring tax cuts and prevent roughly 14 million families from paying higher taxes through the alternative minimum tax.

It drew a presidential veto threat for raising taxes on oil companies.

Then again, President Bush threatened to veto this year's transportation bill, which I had criticized since March, if it exceeded the original plan of $284 billion. He then signed the final $286 billion package, because, well, some members of Congress wanted to spend as much as $400 billion...so $286 was more than originally wanted but a good "compromise" nonetheless.

Much of the bill, passed 64-33 after midnight, preserves tax cuts approved in previous years that are set to expire unless lawmakers keep them alive. "I call this bill the 'Tax Increase Prevention Act,'" said Sen. Rick Santorum, R-Pa.

Senate GOP leaders pledged that when the bill returns to the Senate for final approval, it will also extend the life of reduced tax rates for capital gains and dividends, scheduled to end when the calendar flips to 2009.

"Millions of Americans have benefited from these important tax policies either directly through lower taxes or indirectly through new and better jobs and greater economic security for families," said Treasury Secretary John Snow.

A good start. Now if only they'd do big tax cuts, and just as importantly, cut spending to match. Let's face it: $60 billion over five years is a drop in the bucket compared to federal spending just for this year alone. The federal government will spend $2.47 trillion just for 2005, and $14.3 trillion during fiscal years 2006 through 2010.

Democrats roundly oppose extending tax cuts for investment income. Senate leaders dropped an extension from their bill because a key moderate Republican balked at its inclusion.

Naturally! Democrats don't like it when any "rich" can actually keep money to invest in the economy, never mind that rich people's investment and consumption spending does trickle down to create jobs for everyone else. Democrats also dislike it when the middle class starts investing. After all, investing helps wean people from government's teat (especially regarding retirement), and worse, the mere act of owning a piece of a business transforms them into the mythical Democratic bogeyman of Evil Rich Capitalists. Exceptions, of course, are made for the likes of Ted Kennedy, John Kerry, John Edwards, Al Gore, et al.

The bill would stop a tax increase on about 14 million families in line to pay the alternative minimum tax next year. Originally a levy to prevent the wealthy from avoiding taxation, inflation causes the alternative minimum tax to reach into the pockets of more families every year. Lawmakers regularly enact walls to hold it back.

The AMT simply must go. Even if you believe in progressive levels of taxation, it's one of the stupidest ideas conceived, because there was no indexing for inflation.

Senate Republicans beat back Democratic attempts to use the bill to pinch oil and energy companies that have been reporting record profits while consumers pay high gasoline prices, efforts that reflected sensitivity on Capitol Hill to high gasoline prices and fears of skyrocketing home heating costs this winter.

The largest oil companies, nevertheless, would be hit with about $4.3 billion in taxes through a change in accounting methods. That provision drew a veto threat from the White House and upset some Western Republicans, who deemed it an unfair and political attack on the energy industry.

"Is it a windfall tax by another name?" said Sen. Larry Craig, R-Idaho.

So much for Republicans "beat[ing] back Democratic attempts to pinch oil and energy companies." When will both parties join Sen. Craig, and when will all politicians acknowledge the reality that businesses do not pay taxes, ever? Businesses are only tax collectors for the government: they necessarily pass along their taxes to the consumer.

While the most profusely bleeding heart "progressive" touts the idea of taxing businesses and redistributing the money to consumers, it will not happen because it does not account for incentive.

The Senate defeated a Democratic effort to impose a temporary windfall profits tax, 50 percent on the sale of oil over $40 a barrel, on profits not reinvested in increasing domestic oil and gas supplies. The money would have been returned to energy consumers through an income tax rebate. A 64-35 procedural vote defeated the effort.

"The major integrated oil companies have all of the gain. Who has all the pain?" asked Sen. Byron Dorgan, D-N.D., who then answered his own question: "All the American people who are trying to pay for the price of a tankful of gas or trying to figure out how they are going to heat their home in the winter."

The Senate also defeated an amendment to impose a windfall profits tax on oil companies and use the money to fund a low-income heating assistance program.

I initially debunked Dorgan's myth toward the end of this entry. His first error stems from the erroneous liberal misconception that companies hoard money. Increased profits for any company or any sector of the economy, no matter how great, never "take away" from or "deprive" the rest of the people, or the rest of the economy. Even if it's oil executives getting all the money, what will they do, sit on piles of it? No, they will by definition save and/or spend it. The money goes right back into the rest of the economy, so it's only a shift in spending patterns, with nothing lost.

Oil companies are simply in a cylical heyday, which will not last forever. In the late 1990s, it was technology companies. Once upon a time, it was horse breeders. In 17th century Holland, it was tulips. It's only a matter of which sector at the present time can best capitalize -- i.e. be the most competitive -- on consumer preferences.

In his economic ignorance, Dorgan doesn't understand the role of prices. Prices are critical (as I explained in "The power of markets") not just because they reflect a resource's scarcity and limit consumption, but because they encourage others to "get into the act" and thereby increase the supply. Prices cannot get so high, by definition, unless there are enough people willing and able to pay them. I think regular gasoline peaked at $3.43 down the road from me; today it was down to $2.49. If no one could afford it like some think, how could the station charge a dollar more only two months ago?

It's a nice-sounding progressive idea, certainly appealing to most people, that we can tax oil companies $5 per $50 per barrel oil, or $10 per $60 per barrel oil, then "rebate" the profits to people via income tax cuts. Oil companies could still make a profit, and people would effectively get part of the money back, right? As Gov. Schwarzenegger could say, "Wrong!" If oil is selling at $50 per barrel, oil companies would produce only the oil that's worth $45 to produce. This greatly restricts supply, because they won't bother to supply more expensive oil which certain consumers are willing to buy, and what happens when supply is reduced? The price goes up. Crude oil suppliers could also raise their prices to compensate for the taxes; do you think your grocery store would charge the same prices if it were hit with a 10% excise tax?

Either way, consumers will need that remitted money to cover the increased cost that federal controls produced. Ultimately this idea of "tax and rebate" is self-defeating: it does absolutely nothing, like a large part of federal spending, but establish additional Big Brother bureaucracy that brings consumers a step forward only to take them one (if not more) step backward. I still wonder how Dorgan proposes to rebate the money. How about someone like me, who spends very little on gas compared to my total income? My very situation demonstrates why an income-based rebate cannot work, and providing proof of purchase (like receipts) is logistically ludicrous.

Senators rejected other proposals that would have eliminated a tax incentive for major oil and gas companies that allows them a credit for exploration and development costs. An amendment to ban price-gouging during national energy emergencies declared by the president won the support of 57 senators but fell short of 60 votes needed to overcome a procedural hurdle.

Good and good. Removing a "tax incentive" is the same as increasing taxes, so once again, raising taxes on a business only means passing it onto the consumer. And have we still not learned from the 1970s that price controls lead to shortages?

The overall bill reduces taxes about $60 billion over five years, preserving many tax breaks scheduled to expire unless lawmakers keep them intact. Unlike a version scheduled for debate in the House on Friday, the bill would not extend reduced tax rates for capital gains and dividends. Congress lowered the maximum tax rate on that investment income to 15 percent in 2003, and many Republicans want to act this year to keep those rates in place in 2009 and 2010.

Investment in business allows them to expand and create new jobs, yet Democrats do their best to stymie any efforts to cut taxes on investment that encourage growth. It doesn't matter that the jobs go to lower income brackets; all the Democrats care about is that the tax cuts mean "rich people" can have more money.

The bill also would offer $7 billion in assistance to businesses and individuals hit by Hurricane Katrina and other storms, filling in details of President Bush's proposed Gulf Opportunity Zone.

Would this turn out to be anything like "Supplemental Terrorist Relief Act" loans that were supposed to be strictly for businesses affected by 9/11, some of which wound up at Dunkin' Donuts as far away as Vermont, Ohio and even Georgia? That's right: the New York Post has the full story, which I forgot to blog about last week. Now these were just loans: imagine how bad the grants might be. Would they compare to the infamous $2000 debit cards for Katrina victims, some of which were used to buy Louis Vitton and lap dances? What can I say: I predicted abuse from day one.

One Dunkin' Donuts franchise owner said he knew his business wasn't hurt by 9/11 but accepted the loan anyway. Another claimed his business, in Vermont, was hurt, giving an anecdote about people buying a coffee and two doughnuts before, but "probably" only a small coffee and one doughnut afterward. Then why didn't my aunt's wine store qualify for such a loan after 9/11, when people were buying less? Or was it actually that we were already in a recession, a very mild one which nonetheless influenced people to cut back on their spending?

Other owners claim they didn't know, that they simply borrowed the money for renovations. The banks claim they didn't know they were making STAR loans, just loans, but the article reveals their motive: "Banks had an incentive to hype the loans because the government reduced the traditional fee — saving some of the biggest lenders millions." So I guess nobody knew a damned thing, except the taxpayers who look at their paycheck stubs and wonder for what latest foolishness their earnings are appropriated.

Among many provisions extended in the bill are a deduction for state and local sales taxes, investment incentives for small businesses, a business research and development credit and a tuition deduction. Taxpayers would get new incentives to make charitable contributions at the same time that tax-writers put new curbs on charitable deductions deemed excessive.

As if this bill couldn't have anything more foolish: government wants to give people an incentive to donate to charity, but it will discourage the wealthy, i.e. those who have the most to give, from giving as much as they could. If a deduction is "excessive," how must government view the donation? Badly, as is the nature of big government: to tax you to hell and back, denying you the freedom to dispose of your earnings yourself, and spending on the money on what it says is best for you.