Republicans want to pay for Wall Street bailout with tax cuts?

US Rep. Jeb Hensarling (R-TX).
Image via WikipediaGovernment reform orgs. deliver news on major events within their areas of expertise. From: OMB Watch

Shockingly, Republicans Want to Bailout Wall Street with Tax Cuts

Budget afficionado Stan Collender says that a $700 billion Wall Street bailout will define the budget and, ultimately, the next president's spending priorities for several years.

That would increase the deficit to $1 trillion or more. (My apologies for the italics, but it's hard not to use them in this situation.) If what's left of the $700 billion is spent in 2010 and activities in Iraq and Afghanistan continue that year, the deficit for two consecutive years could be close to that level.

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But it's also hard to see how the 2001 and 2003 tax cuts, which expire at the end of 2010, get extended as easily or completely as they might have before. In fact, nothing else that might be considered in the next few years has the potential to reduce the dramatically increased deficit by as much as quickly as scaling back on these cuts or letting them expire.

Some provisions, like marriage penalty relief and the $1,000-per-child tax credit, might still be a slam dunk. But others, like the top marginal tax rate, capital gains, dividends, estate and gift taxes, and small business expensing, are clearly in jeopardy now.

I don't know, Stan. One should never underestimate the appetite Republicans have for tax cuts. In their world, there's never a bad time for a tax cut. From a BNA email:

A group of House Republicans proposed Sept. 23 temporarily suspending the capital gains tax as a way to coax capital back into sluggish lending markets and offset the cost of a proposed government bailout of the U.S. financial system.

"We have a liquidity crisis and this would bring as much as a trillion dollars in capital sitting on the sidelines, we believe, back into the market," Rep. Jeb Hensarling (R-Texas), chairman of the Republican Study Committee, told reporters at a press conference.

At least Hensarling just skipped the "tax custs pay for themselves" nonsense and went straight for a bold new baseless assertion.

It strains the imagination to believe that investors are "sitting on the sidelines" because the capital gains tax rate is too high. They didn't seem to mind it in the late 90s when capital gains rates were nearly twice what they are today and the stock market saw a 34% increase from 1997 to 2000. It is my understanding, however, that the stock market has been declining the past year, which means the average investor has been paying nothing in capital gains taxes. In fact, because investors can claim capital losses as an income tax deduction, they have an incentive to gamble on the market as their actual losses will be reduced by the amount their income taxes are reduced. Cutting the cap gains rate to zero might induce even more people to wait until market conditions improve, because the average investor would see his tax bill increase.

Image by Flickr user sea_bass used under a Creative Commons license

Posted by Craig Jennings

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