Friday morning, somewhat unexpectedly, the President signed the American Jobs Creation Act of 2004. Until a few days ago, the word had been that the bill would sit on his desk until Election Day or later, presumably because there was no time for a signing ceremony in the last days of the campaign.
I doubt that there is any great political significance to the decision to take care of the matter now rather than later. The elite media will doubtless try to find a sinister side to what they keep characterizing as a “corporate tax cut” (the measure is in fact revenue-neutral according to the Joint Tax Committee) and will overlook the important fact that, the sooner it was signed into law, the sooner could begin the process of removing the tariffs imposed by the European Union in retaliation, blessed by the WTO, for the “export subsidies” that AJCA removes. Resolving this trade dispute, to which Democrats in Congress were mostly oblivious (including a certain French-looking Senator from Massachusetts who by the way served in Vietnam) is a good thing. (Senator Kerry came against the bill, and a spokesman said immediately after its signing that, elected, he would seek speedy repeal. See the addendum for a few more words on that topic.)
From my personal point of view, what is important about AJCA is not the parts that add or subtract revenue but the provisions altering the tax treatment of nonqualified deferred compensation. Their purpose isn’t to raise money for the fisc (their revenue impact is a negligible billion dollars total over ten years) but to appease pseudo-populist resentment through pseudo-punitive restrictions. The upshot is that, whether or not AJCA creates American jobs generally, it certainly creates work for Americans like me.
I suppose that I’m ungrateful to gripe about a fountain of billable hours, but this development illustrates in miniature the defects of a tax system that makes an important point of reforming human behavior as well as collecting revenue. The impetus for deferred compensation “reform” came from tales of gigantic pay packages given to executives as they departed their employers. Feelings of envy were aggravated by (mostly inaccurate) articles in publications like the New York Times and Wall Street Journal alleging that the executives who were promised these packages bore no real risk of non-payment in the event of employer insolvency. Why aren’t they being taxed now? the media demanded to know.
The quick answer was that the Treasury has little reason to care when deferred compensation is taxed, because taxation of the employee is accompanied by a deduction for the employer (in some cases delayed by a year, so that the fisc actually profits from deferral). Since taxable entities and their employees tend to be in pretty nearly the same tax brackets, the net effect is a wash. (The rules are different, and much less favorable, for tax-exempt employers, to which deductions are meaningless. The government maximizes revenue by taxing their executives’ deferred compensation as soon as it vests.)
In the absence of any significant revenue considerations, sensible tax policy dictated rules that were understandable and free of traps for the unwary. The old deferred compensation regime perhaps did not wholly attain to that ideal, but it had the virtue of leaving plan design to the parties involved and imposing tax in a way that made intuitive sense. Its replacement is essentially a government-designed straitjacket. As straitjackets go, it isn’t particularly constricting, but why should Capitol Hill staffers, few of whom have ever so much as participated in a private sector deferred compensation arrangement, be deciding what features are best for all situations? If some Congressional socialist were to propose putting compensation deals between companies and their executives under the supervision of a federal oversight committee, he wouldn’t attract 20 votes, yet it proved easy to slip an equivalent intrusion into a tax bill.
So it is with much other political aggrandizement and social engineering. The income tax has theoretical advantages over other forms of taxation, but those are balanced, if not outweighed, by a practical flaw: No other form of taxation is so readily manipulated for non-revenue ends. The cumulative impact of decades of petty tinkering for petty ends has probably done as much damage to the economy as a couple of middle-sized wars.
Addendum: Among Senator Kerry’s leading campaign themes are the decline in American manufacturing jobs and the evils of outsourcing. One would imagine, then, that he would find AJCA’s centerpiece, a tax rate reduction for income derived from U.S. production facilities, compatible with his aims. Instead, he promises to seek its repeal as a first order of business, should he become President. Since the rate reduction was designed to offset the elimination of export tax subsidies, the net effect of its repeal would be an unequivocal tax increase on a segment of the economy – domestic manufacturing – that is supposedly the object of the Senator’s solicitude. Or perhaps he would also like to restore the erstwhile subsidies and resume the nascent trade war with the rest of the world. That is a fine policy for a soi disant multilateralist!
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