This column is the third in a four-part series looking at economic impact of a number of different fiscal policies being bandied about our nation's capital. This month I'd like to take a look at the mechanism for distributing tax breaks, as well as some of the tax proposals currently under consideration.
One option for distributing the tax cuts is to make immediate reductions in withholding tax, and stipulate that refunds for income earned this year prior to the change in withholding rates be distributed after April 2002.
This would have the advantage of putting additional money in the hands of taxpayers immediately, and at the same time minimizing the expense to the government for complying with the new rates. Businesses, on the other hand, will be up to their eyeballs in paperwork as they make these midyear changes.
In addition to the idea of a direct rebate to taxpayers, elimination of the marriage penalty tax and revision of estate taxes are also under consideration.
At this point, elimination of the marriage penalty appears certain. The impact of this change in our tax laws on the economy will be similar to that of a direct rebate — it would put income into the hands of consumers and investors.
Since the marriage penalty is greater in total dollars as the marginal tax rate of the taxpayer increases, wealthier taxpayers would experience this relief primarily as a reduction in taxes. For this group of taxpayers, the change would not impact their level of spending as much as it would their level of investing. This increase in investing, however, would provide needed capital for business.
The deduction proposed for dependent children is to be applied to the tax owed. This would significantly affect taxpayers in the lowest tax brackets, and they are more likely to spend the money than invest it.
The estate-tax situation is a bit trickier since it involves both active and passive assets. Active assets are those of an ongoing business, such as a farm or a neighborhood bakery. Many people believe that the current estate tax puts an unnecessary burden on those who inherit small businesses. In fact, in some cases the estate taxes are so high that they have to sell the business or shut it down entirely. Neither of these events should be tolerated. The importance of eliminating the estate tax on active assets cannot be overstated.
Passive assets are another issue altogether. In this instance, estate taxes have been used as way to transfer wealth. If that's what the government wants to do, then taxing stocks, bonds, and other passive assets that are inherited is appropriate. Most of the people with substantial passive assets have already developed estate-planning procedures to avoid the tax, and will continue to do so in the future.
There is another tax that is particularly important for trucking that's not making the headlines: the excise tax. This tax is really a type of user fee that reduces the incentive to increase productivity. It does this by increasing the cost of a good beyond its deliverable economic value.
For example, if you can sell something for $1 that the buyer can use to make $1.10, then buyers will be motivated to purchase it. But if an excise tax of 10% is placed on the product, the incentive to buy it disappears.
Excise taxes put a disproportionate burden on those industries that need to buy the excised goods. They're especially at a disadvantage when vying for capital in an open market against companies in industries that aren't beseiged with excise taxes. The theory that all markets will eventually account for all costs doesn't work when you're talking about individual companies. The only solution is to eliminate excise taxes across all segments.