Monday, August 06, 2007

Dishonest Tax Rhetoric, Part 1 of 3

One of the oddities of studying tax law is that mind-numbing technical details coexist with bluntly political posturing. The recent debate over taxing hedge fund and private equity fund managers is a good example, with arguments about whether managers' compensation is more like capital gains income than regular earned income complicating -- and, to a certain degree, being used to distract from -- the debate over the big political questions of tax equity and income distribution. (For what it's worth, I don't think there is any question that it is regular income that should be taxed at the standard graduated rates. I'm also one of the people, though, who doesn't think that the special rates for capital gains should exist in the first place, which is what causes the issue to matter at all.)

The joys of studying tax policy thus include the joy of confronting shameless political rhetoric. To lighten the summer doldrums, I am posting here my top three list of current tax dishonesties, i.e., constantly repeated bits of rhetoric that substitute for analysis in the great and never-ending U.S. tax debate. Today, the bronze medalist:

"Biggest Tax Increase Ever"

There are actually several sub-dishonesties combined into this bit of distorted tax rhetoric. Now that taxes have been completely demonized, everything that is bad has to be analogized to taxes, and all changes in tax policy have to be described as tax increases. Further, everything that is NOT done must also be described as a tax increase. Finally, whenever possible, it is essential to describe whatever has (perhaps creatively) been described as a tax increase as the biggest ever.

The best recent example of at least the latter two elements of this rhetorical move is the breathless descriptions of the expiration of the Bush tax cuts. The 2001 tax bill had a smaller long-term revenue impact than it otherwise would have had because of the sunsets built into it, with most of the provisions expiring after 2010. Having thus passed temporary tax cuts, the expiration of tax cuts quickly became labeled tax increases. Moreover, allowing those temporary tax cuts to expire would be the biggest ever, because they add up to some arbitrary number of billions of dollars, a number which is greater than any previous tax increase.

Of course, if you're describing a permanent tax provision as a tax increase, it is possible to raise the supposed cost by looking further into the future (and not discounting to present value). Moreover, you can always take advantage of inflation and economic growth to describe some tax change in 2006 as bigger than one in, say, 1982, because a $100 billion change in 1982 was more than 4 times as large (as a proportion of GDP) as $100 billion in 2006. The relentless growth of our enormous economy makes it possible to describe proportionately small things as historically record-setting.

Why is this only #3 on the list? What is it about the dishonest rhetoric above that makes it slightly passable? This is not a defense, of course, but the elements of this brand of dishonesty are based on the lack of a consistent baseline. It is true that the expiration of a temporary tax cut results in the government's collection of more tax revenue than if the temporary cut had been extended. Further, a naive person could honestly be confused about the relative size of a tax cut, thinking that $100 billion now and $100 billion in the past is an apples-to-apples comparison.

These are, of course, weak defenses at best. I do not for a moment imagine that those who aggressively promote this third-place version of dishonest tax rhetoric are unaware of (or do not intend) the potential to mislead. The second- and first-place versions are, to my mind, simply worse. More tomorrow and Wednesday.