Tax Analysts Blog

Tax Cuts and Teaser Rates

Posted on Dec 28, 2010

You're well aware of the headlines by now. The Bush-era tax cuts have been extended for two years, through the end of December 2012. American citizens are pleased their tax rates won't be increasing on January 1, 2011, and media pundits are rushing to declare the political winners and losers. Here's my take: This is a pyrrhic victory at best. Our nation couldn't afford them a decade ago, and we can't afford them now.

Don't get me wrong, I like tax cuts. But I prefer it when they're paid for. Conservatives Alan Greenspan and David Stockman have expressed similar views. Yes, please cut our taxes. But not with borrowed money.

What's wrong with temporarily extending expiring tax rates, you ask? Shouldn't we applaud them so long as they put more money in our pockets?

My response is that temporary tax breaks are a form of deceit. They purposefully disguise the true cost of government.They are in the same vein as the 'teaser' rates that some credit card companies use to lure in customers -- advantageous in the short run, but extraordinarily bad in the long run.

This gimmick has been used elsewhere in our tax code. You see it in the AMT patch and in the business extenders that come up for renewal every year or two. Both of these provisions are immensely popular. The AMT patch in particular prevents millions of Americans from paying much higher taxes every year. So why then doesn't Congress make these temporary fixes permanent? Simple: We can't, it costs too much.

This ploy works so well that we will likely see more of it in the years to come. I can easily see the day when the bulk of the revenue provisions in the U.S. tax code are temporary measures scheduled to expire at year's end.

Is that the best America can do? Would you want our vital governmental institutions to be temporary? Would you want the Army, Navy, and Marine corps subject to a statutory phase out? (Sorry, there's no more national defense this year -- it didn't get renewed before December 31. Don't tell Al-Qaeda.)

Here is my challenge to the incoming Congress and President Obama: Don't toy with legislation that masks the true cost of government. If there's bad news regarding our fiscal health (and we know there is), give it to us straight up. No sugar coating. That means no more teaser rates to keep us sedated through the next election cycle.

If politicians want to score political points by lowering my taxes, that's fine. Just pay for it. And if that means broadening the tax base or reducing the public sector (or both!), then so be it.

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