Wednesday, June 20, 2007

The Democommie Congress At Full Flood

The Republicans lost power last November in part because of the frustration of their "base," which was angry at them for increasing federal spending, doling out pork-barrel "earmarks," and endorsing welfare-state measures. But I think this decision should go down as a case of the old paradox of "what is seen and what is not seen."

This paradox was identified by the great economist Frederic Bastiat, who pointed out that government spending can often seem beneficent because all that people see are its immediate effects: a new bridge, or the welfare checks paid to alleviate the plight of the poor. But what people do not see is the economic value that has been wiped out, the private investment and production that now will not occur because of that government spending. They don't see it, precisely because it doesn't happen.

I think a similar thing happens in politics: we saw all of the bad things that the Republicans did while they were in control of Congress—but we didn't see all of the bad legislation they blocked, precisely because they blocked it. But with Democrats in control of Congress, the floodgates open. Republicans backed some welfare-state, big-government measures; the Democrats are backing all of them, from a carbon tax to socialized medicine.

Here's an update on another of the new Democratic onslaughts: an attempt to eliminate crucial recent tax cuts on dividends and capital gains. These tax cuts are important economically because they immediately increase the value of investments and therefore encourage greater investment and risk-taking—while a reversal of the tax cuts would amount to the punishment of investment.

Add to this the fact that much of this anti-investor frenzy is wrapped up in an attack on "hedge funds" (see Larry Kudlow on this). Hedge funds are investment funds open only to large investors who are certified by the SEC to be big boys who are capable of making their own decisions and who don't have to be protected from themselves—not like the rest of us. Thus, these funds escape most of the SEC's paternalistic regulations. And that is why the Democratic Congress has selected these funds as a special target for regulation and tax increases.

"Politics Point to Higher Tax on Dividends," Mike Cosgrove, Investor's Business Daily, June 18 Equity investors seem comfortable with the idea that the existing tax rates on dividends, capital gains and earned income will stick around until at least the end of 2010—their scheduled expiration date. The odds of that occurring are, at best, 50-50 at this point.

One side of the 50-50 is that all major Republican candidates support extending the present tax-rate structure past 2010. The other 50 is from all major Democratic candidates who have said they will not extend existing tax rates—meaning higher tax rates on earned income, capital gains, and dividends for taxpayers.

Realistically, however, the existing tax rates are history post-2008 should a Democrat win control of the White House in next fall's election. That message is clear from Democrats on the House Ways and Means Committee who have already released a plan to hike personal tax rates….

Sens. Hillary Clinton and John Edwards both voted against the Economic Growth and Tax Relief Reconciliation Act of 2001. That legislation, signed by President Bush during the 2001 recession, made a major contribution to the current economic expansion by lowering tax rates on earned income, thereby encouraging entrepreneurship, production, employment, and productivity growth.

Their vote was "no" again in 2003 on the Job Growth and Taxpayer Relief Reconciliation Act of 2003 that, in part, reduced the tax rate on dividends from 38.6% to 15%, meaning dividends were worth 38% more to taxpayers. And taxpayers receiving capital gains after May 2003 kept 6.3% more as they kept 85% of their gain, up from 80%.

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