Would a Permanent Extension of Tax Rates Really Create Certainty?

In the late 1990s, there were typically fewer than a dozen tax provisions that had just a limited lease on life and needed to be renewed every year or so.

Today there are 141.

That is from today’s Wall Street Journal. If speculation is accurate, today’s Congressional vote will only exacerbate this trend. By my count, it creates temporary provisions for:

  • All income tax rates
  • Capital gains tax rates
  • Dividend tax rates
  • The Social Security payroll tax rate
  • The estate tax rate
  • Student loan tax credits
  • Per-child tax credits
  • The Earned Income Tax Credit
  • The tax credit for blending ethanol into gasoline
  • The $1.00 per gallon biodiesel tax credit
  • A tax credit to incentivize alternative fuel
  • A tax credit for maintaining railroad tracks (really?)
  • Expensing of business investments
  • And others (the WSJ refers to “dozens of corporate-tax provisions that already were subject to annual renewal”; some of these may or may not be in my list above). 

As my colleague, Jason Fichtner and his coauthor, Katelyn Christ, have recently written, uncertainty and tax policy are a fatal policy mix.

Previous research suggests that policy uncertainty can be very harmful to economic growth.

But all of this talk about temporary tax provisions obscures an important fact: Even if the Congress were to make current tax provisions permanent, there would still be an enormous amount of uncertainty in current tax policy. This is because, over the long run, government expenditures are on an unsustainable path and by the simple arithmetic of budgeting, taxes will eventually have to go (way) up or spending will have to go down.

If policy makers truly want to generate certainty and create an environment conducive for economic growth, they will need to reform the tax code, make the reforms permanent, and bring spending in line with taxes.

2 thoughts on “Would a Permanent Extension of Tax Rates Really Create Certainty?

  1. Anonymous

    In most accounting textbooks, past rules are mentioned to help explain why the current rules are what they are. In my tax textbook, past rules were sometimes covered just as extensively as present rules, just in case they were enacted into law again (“sure, it’s not 1985 now, but who knows what tomorrow will bring?”).

  2. Pingback: Uncertainty and Growth « Double Taxed

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