When is a tax hike not a hike? When it's a tax un-cut!
As Republicans and Democrats clash over whether to extend the Bush tax cuts of 2001 and 2003, the battle has become largely rhetorical. The GOP paints the prospect of letting the tax cuts for the wealthiest Americans expire—which would reduce spending by an estimated $678 billion—as a hike. "This is about stopping a job-killing tax hike on small businesses during tough economic times," said Republican Sen. Orrin Hatch over the weekend. Democrats, meanwhile, say they're merely proposing a return to home base, a restoration of the world as it was and should be. From their angle, it's the original tax cuts that were abnormal. They're just un-cutting the cut.
Tax policy is a lot more complicated than "cuts" and "hikes." Yet politicians insist on reducing every proposal to one of the two. If the debate over tax policy is going to be accurate, it's probably worth diversifying our terminology.
The hike. This is your basic, no-frills tax hike. There are two main methods: You can raise the rate of taxation—for example, President Clinton's 1993 tax hike raised the corporate income tax rate from 34 percent to 35 percent. Or you can increase the amount of money being taxed—so if a tax normally hits people who make up to $100,000, you can then make it hit people who make up to $150,000. Politicians might call that "expanding revenue" or some such, but a hike is a hike is a hike. Economists generally prefer broadening the tax base to raising rates, because raising rates incentivizes some people to work less.
The cut. Again, two methods: You canlower tax rates, or you can reduce the amount of money that gets taxed. The Bush tax cuts, for example, slashed the top estate tax from 60 percent in 2001 to 45 percent in 2007. They also reduced the total amount of money that's taxable. Most economists urge rate cuts over reductions in the tax base, since it encourages people to work.
The break. The break is the cut's younger sister. Instead of explicitly reducing a rate or narrowing the tax base, you carve out a loophole for a particular activity. For example, the Bush tax cuts of 2001 doubled the child tax credit. This served the dual purpose of encouraging an activity—in this case, having children—and putting more money in people's hands.
The sunset. Less direct than the hike or the cut—but still often described as such—this means deciding not to extend a tax hike (which opponents can spin as a tax cut) or not to extend a tax cut (which they can spin as a hike). That is, you "let it sunset." For example, New York Attorney General Andrew Cuomo, who is running for governor, has proposed allowing a tax hike on the wealthy to expire next year. "If it doesn't sunset," he said, "it's a tax." On the flip side, Democrats want to let Bush's tax cuts sunset in 2010, at least for families making more than $250,000. Republicans, of course, portray this as a hike—even though it would merely return us to previous tax levels. That's the thing about most sunsets; they're almost always mirages.
Kick the can. Pass a tax hike or cut now that kicks in later. This is a way to say you did something but not to bear the full blame for it once it takes effect. When Democrats needed a way to pay for health care reform, they settled on a tax that doesn't kick in for another eight years. There's an economic rationale for the delay—it gives people time to switch to insurance plans that won't be as heavily taxed. But it's also a political tactic: Delay the pain, delay the blame.
The incremental cut/hike. Don't feel like slashing things all at once? Phase the tax policy in, one year at a time. That was the approach to the Bush tax cuts, which did much of their cutting after 2004. By changing the economic landscape gradually rather than suddenly, it becomes harder to repeal the cuts by the time they expire.
The derivative cut/hike. If a tax is set to increase over time and you slow its increase, is that a cut? Conversely, if it's decreasing over time—as the Bush tax cuts did—and you slow its decrease, is that a hike? This kind of reversal in the trend of a tax doesn't happen often, but the opposition would no doubt construe as a hike or a cut.