With Resistance to Tax Extenders, Conservatives Invite a Huge Tax Hike

by J. D. Foster

The collection of on again/off again tax provisions known as extenders once again awaits congressional resuscitation, with the House and Senate as usual taking different tacks. Many conservative groups have taken to opposing extending these provisions altogether. The substantive arguments raised against the extenders package evidence a surprising sea change in the way conservatives view economic policy — one wonders if they are aware of it.

For those blissfully unaware, the tax extenders are tax provisions Congress has repeatedly supported but always passed on a temporary basis. Thus these provisions occasionally expire, and again we have the exercise of arguing which should be extended, which not, all spiced with a little drama about the timing. To be clear, my organization, the U.S. Chamber of Commerce, has argued these provisions should be extended and then Congress should get back to work on comprehensive tax reform.

The immediate issue is not the extenders package per se or the items therein, but the apparent evolution of conservative positioning on this issue. Consider a key vote issued by Club for Growth against the Senate extenders package, and a recent blog out of FreedomWorks in which the very first sentence refers to the tax-extenders package recently passed out of the Senate Finance Committee as a “$85 billion two-year tax break bill.”

Not so long ago, Congress faced a similar situation with a provision known as the “AMT  patch,” a tax cut originally enacted so the 2001 and 2003 Bush income tax cuts didn’t throw millions of taxpayers onto the parallel Alternative Minimum Tax. The patch was, like the tax extenders we have today, a temporary measure that we had to debate over and over again.

The important lesson out of the AMT patch: Taxpayers thought of the patch as part of the regular tax code. Allowing the patch to expire would reasonably have been seen as a huge tax hike. Eventually most members of Congress came to understand that they shouldn’t have to “pay for” a tax provision that prevents a tax hike. In a budget-neutral system, it makes sense to try to offset a tax cut, but avoiding a tax hike should never require an offset.

The lessons of the AMT-patch debate appear now long forgotten. Allowing the tax extenders to expire is definitely a tax hike. One may or may not approve of any or all the specific provisions, but their expiration results in higher taxes on specific taxpayers and higher revenues in the aggregate. Calling a tax extenders bill a “tax break” is to say anytime one fails to raise a tax, it’s a tax break. This is the administration’s position, something FreedomWorks might want to notice.

Not long ago, another strain of conservatism argued that, while some tax cuts were better than others, any tax cut is good because it serves to limit the size of government. This makes FreedomWorks’s position problematic: If conservatives really believe the tax-extenders bill is a tax cut, why are they opposing it? Are they now in favor of higher taxes and a bigger government?

There are other issues in the FreedomWorks piece. It describes the bill as a “spending spree,” for instance, which is quite amazing. Conservatives are now calling the lightening of a tax burden a spending spree. Not long ago conservatives observed that this mindset ultimately implies all monies earned are the property of the government and it is only through its beneficence we are allowed to keep some for our own use.

Another example: FreedomWorks raises for particular objection a tax provision known as “active financing.” This provision involves how we tax U.S. companies operating overseas, and the details are too complicated to describe here. The gist of the matter, however, is the U.S. operates a punitive “worldwide” system that taxes U.S. companies on income earned around the world, an idea even most left-leaning countries in Europe have abandoned. Conservatives have traditionally led the charge in favor of the more pro-growth “territorial” system. Active financing is one of a handful of tax-code provisions blunting the economic harm done by worldwide taxation. In opposing the active-financing provisions, in other words, FreedomWorks is effectively strengthening the Left’s case for worldwide taxation, in principle fully in accord with the administration.

Favoring higher taxes; confusing taxation for spending; leaning toward worldwide taxation – these are odd positions for conservatives. One suspects there is less a conscious evolution here than opportunism driven by a desperate need to define oneself through opposition, but who knows? A standard joke in political theory is that if one goes far enough to the right as a conservative one meets oneself as a Communist, and vice versa. Should we next expect FreedomWorks to espouse farm collectivization and a great leap forward? Stay tuned.

— J. D. Foster is deputy chief economist at the U.S. Chamber of Commerce.

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