CUT NOW, PAY LATER

The tax cuts on capital gains and dividends approved last week by Congress are open to every American – all you need is a very large stock portfolio.

You don’t have a large portfolio? Congress is helping you out there, too. It offers inspiration by showing how much it values wealth (which it will tax at 15 percent) over work (top tax rate is 35 percent).

The message is clear enough, but the congressional rewards for the rich are not sustainable – annual deficits of $300 billion or $400 billion and a national debt of $8 trillion cannot confront the coming demands to provide Medicare, adjust Social Security, pay for a war and still cover basic government services. It can’t unless Congress expects working-class Americans to pay much more.

Several of the tax cuts supported by the House and Senate were not controversial. The alternative minimum tax, marriage penalty and child-tax credit have broad support, though that doesn’t make them affordable. The fight was over the capital gains and dividends extensions as well as a permanent provision that lets families that otherwise had incomes too high to qualify for Roth IRAs to roll over their regular IRAs into Roth accounts.

Maine’s Republican senators, Olym-pia Snowe and Susan Collins, split on the vote, with Sen. Snowe opposed to the cuts and Sen. Collins supporting them. Reps. Mike Michaud and Tom Allen both voted in opposition.

Supporters in Congress claim the investment cuts deserve credit for the rise of the stock market, reducing the cost of equity capital, but the claim is not credible. For instance, a recent paper by members of the Federal Reserve Board that looked at the effect of the dividend tax cut and concluded, “we fail to find much, if any, imprint of the dividend tax cut news on the value of the aggregate stock market.”

The authors further noted that nondividend stocks slightly outperformed the overall market. In any event, if these low taxes caused the market rise over the last couple of years, how does anyone explain an even faster-rising market in the 1990s, when the taxes were higher?

Nor have these cuts paid for themselves, another claim made after the amount of money brought in by these taxes rose. The Congressional Budget Office last February looked at early figures and concluded, “After examining the historical record, including that for 2004, we cannot conclude that the unexplained increase [in capital-gains realizations] is attributable to the change in capital gains rates.”

So why extend them? Because not to would be a tax increase, say Republicans, who previously avoided recognizing the full cost of the cuts by claiming they were only temporary. (In fairness, it was known at the time that this argument was fatuous.) To mask the size of the cut going forward, this time it will be extended only until 2010.

The IRA change is a quick way for Congress to raise revenue, by making those with higher incomes eligible for the Roth IRA, which is taxed up front but tax-free on withdrawal. It would be one thing if Congress were to debate who should qualify for this benefit and account for the actual cost, but what it has passed is mere trickery.

Neither sleight-of-hand nor slim arguments will pay the bills, and all those temporary tax cuts are adding up to a long-term debt that still must be paid.