By DAVID MOON, Moon Capital Management
Amid great fanfare, President Bush signed his $1.3 million tax cut plan into
law, promising to return some of the federal government surplus to the people
who sent the unneeded money to Washington. The plan was criticized
by many liberals as favoring the wealthy, ignoring the plight of the working
poor for whom a redistribution of federal tax revenues would mean a more
substantial increase in their wealth or standard of living. Conservatives
argued that since you could not give someone a tax cut in excess of their tax
bill, the benefits of any tax cut must flow to the people who initially provided
the tax revenue. To simply redistribute collected tax revenues to those
who had not paid it would not be a tax cut, it would be a new welfare
Pardon me if I don't get too excited watching this almost purely theoretical
debate. It has very little to do with reality and might never
significantly affect your pocketbook. Having the debate is valuable,
however, if for no reason other than it forces our elected officials to clearly
show their beliefs about the role of government in our financial affairs.
But the debate is only remotely related to the actual tax package. This
plan extends most tax cuts so far into the future that if the eventual outcome
looks anything like the advertised version, it will probably be as the result of
Many of the problems with our tax code are illogical, if not
counter-productive and immoral. Consider the marriage tax penalty.
No one argues that the federal government ought to financially penalize folks
for choosing to seal their relationships with a legal and religious
ceremony. At a time the federal government takes more of our money than it
needs to support its current spending (plus eight percent growth this year), why
not immediately eliminate the marriage penalty? This plan does not even
begin to eliminate the marriage tax penalty until after the end of Bush's
current term of office. Even then, the reduction is gradual.
The much-debated elimination of the estate tax is not slated to occur until
2010. Until then, the exemption amount increases every two or three years,
giving the families of wealthy, but terminally ill individuals a financial
incentive to keep life support going until the next exemption increase is phased
in. Thanks to the government, you can add your doctor to your estate
Several of the tax benefits in this plan (such as deductions for higher
education tuition) begin almost immediately, but are scheduled to expire at a
certain future date. Why? Is deductible college tuition a good idea
The problem is politics. Candidate Bush talked about across the board
tax cuts, promising to make tax filing simpler and rates more flat. This
is the revenue side of the conservative fiscal mantra and Bush needed to prove
his worthiness to the conservatives, lest they leave him for John McCain.
Running for office is much different than governing, however. Campaign
policy can be implemented with a mistaken tap on a speechwriter's
keyboard. Tax policy requires a selling effort to a 535 elected
legislators, each with their own real and perceived constituencies.
What started as a plan to cut rates across the board, ended as a ten-year
plan to provide more targeted tax benefits to people who act in the ways
government wants them to. Go to college. Itemize your
deductions. Don't itemize your deductions. Put money in your Roth
IRA. Have a child. Take out a student loan. Hire an
accountant. In other words, be good little boys and girls, act like the
government tells you to and maybe you will get some of your excess money
back. The debate was interesting and enlightening; the reality leaves
almost everyone unsatisfied.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).