Politics & Policy

Return of the 3-Martini Lunch

Breaking: Liberal Democrat seeks to repeal a tax!

Democrats are all about raising taxes — they have certainly earned the reputation. All three of their leading presidential candidates have promised to raise income taxes, capital-gains taxes, dividend taxes, and the estate tax.

Last week they voted to increase cigarette taxes by 61 cents. Emboldened by their new majority, they have just this year proposed tax increases on small cigars, independent landlords, hedge-fund managers, oil companies, carbon emitters, multinational corporations, and health-care plans.

Democrats have even proposed a “piggyback tax” to pay for the Iraq war, and don’t have any illusions that such a tax would end with the war. More than 100 years after it was established, President Clinton vetoed repeal of the 1898 Spanish-American War tax on phone service. (It was only abolished last year by the Treasury Department.)

Democrats love taxes, and higher taxes are better ones. So isn’t it interesting that they are now the ones trying to revive the three-martini lunch?

The fame of this gluttonous noontime repast dates back to the Carter administration, whose simple-minded zeal for “tax simplification” usually involved tax increases instead of cuts. Business owners, the complaint went, were “cheating the government” by writing off massive business lunch tabs (which in that civilized age included copious quantities of alcohol).

Although Carter never succeeded in taxing the “three martini lunch,” his successor, President Reagan, went along with a Democratic Congress to limit this deduction to 80 percent in the 1986 round of tax reform. Prior to that, the allowable write-off for qualified business meals and entertainment had been 100 percent. In 1993, as part of President Clinton’s tax hike, the allowable deduction was reduced again to 50 percent — much to the dismay of the restaurant industry.

Now an obscure Senate bill (S. 58) seeks to repeal the Clinton tax-hike on business meals and entertainment. Surprisingly, the return of the three-martini lunch is being proposed by Democrats. Sen. Daniel Inouye (D.) is sponsoring the bill, and its companion House bill is sponsored by his colleague in the Hawaiian delegation, Rep. Neil Abercrombie (D.). The Hawaiian connection is not hard to figure out — tourism and hospitality are the largest industries in the Aloha State, accounting for nearly a quarter of its economy. It is a very popular location for business conferences, which qualify for the meals and entertainment write-off. This tax cut would boost Hawaiian restaurants and hotels, perhaps even giving them some room to raise their prices and adding as much as $108 million to the state’s annual economy, according to the National Restaurant Association.

It goes without saying that no conservative could possibly oppose such a tax cut. Yet conservatives also buy into the idea that every change in the tax code creates an incentive of some kind, and therefore some tax cuts are better than others. This provision would allow business owners to eat and drink more freely with their clients — an unmistakable good, and certainly a good thing for the restaurant, sports, and entertainment industries.

By contrast, however, a cut to income, capital gains, or corporate tax rates benefits everyone by encouraging economic growth. When the government siphons off less of the nation’s economic production, this encourages Americans to invest more freely in their businesses or in the financial markets — both of which ultimately create all of the jobs Americans hold in the private sector. When top marginal rates are reduced, there is less disincentive to expand further and take on more employees. No martini deduction could ever do this so effectively.

“We wouldn’t necessarily oppose this bill,” said one GOP aide on Capitol Hill. “But it’s a clear case of misplaced priorities when Democrats worry about Hawaiian conferences while Middle Americans deal with higher mortgage rates and the higher taxes they’re planning to pass.”

Along the same lines, Rep. Earl Pomeroy (D., N.D.) is sponsoring a bipartisan bill in the House with Rep. Phil English (R., Pa.) to cut the excise tax on beer from $18 to $9 per barrel. (North Dakota is the nation’s largest barley producing state, producing 40 percent of the national crop in 2003.)

Whether it’s about martinis, beer, or solar energy, the Democrats’ approach to taxes is simple: It all depends on who benefits. The government can use a carrot to pick winners and losers among special interests such as the beer, restaurant and oil industries. Then it can use a stick on all the rest of us — investors and wage earners. For Democrats, tax cuts are for special interests, not general economic growth or the common good.

These tiny Democratic tax cuts are probably going nowhere in this Congress, although there is always the off-chance that they will be included in next year’s Alternative Minimum Tax package.

But it is wonderful to see a few Democrats trying to decrease taxes for a few people. Wouldn’t it be even better if they’d at least stop trying to raise taxes on everyone else to make up for it?

– David Freddoso is an NRO staff reporter.

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