Thursday, February 16, 2012

The telephone excise tax shows us the way

Article first published as How Temporary Measures Become Permanent Ones on Technorati.

Government often responds to emergencies or the like with policies or programs that are designated as "temporary," as things that need to be done in the short term, but will ultimately be unnecessary and  repealed/cancelled/eliminated. And we all know--I would hope--that more often than not, many such temporary measures become essentially permanent.

Take a look at this newspaper article from 1967. Entitled "Temporary Measures Can Become Pretty Permanent," it mentions a luxury tax on telephones enacted during the war (World War II) that ended in 1966, only to immediately be re-enacted in 1967. In reality, the history of this particular tax extends back to 1898. Yes, 1898. It was established then to help pay for the Spanish-American War and was--surprise, surprise--based on the idea that only the rich had telephones, so they could afford to pay the tax easily.

Now, the tax was actually repealed in 1902, but at the start of World War I, it was enacted once again (a 1% tax on calls over a certain threshold, by the way) until 1916. The start of World War II saw it's re-enactment, this time starting at a rate of 6% and eventually moving up to as high as 15%. In 1958, the minimum threshold was eliminated, making the tax applicable to all phone calls. As noted above, the end of this iteration came in 1966, only to see it return--due to the Vietnam War-- in 1967 at a 10% rate.

From there, the tax became pretty much permanent--though the rate eventually dropped down from 10% to 3% or less, depending on the year--as it was extended each time it was set to expire, despite a lack of wars to justify it. Legislation that would have ended the tax permanently passed Congress in 2000, but was vetoed by President Clinton.

Since then, the impact of the tax was lessened in 2005--after a court battle--and another attempt was made in 2011 to repeal it permanently. But it's still with us, even if not at the punitive levels of the forties and fifties. Thus, we can see how a "temporary measure"--a narrow tax--essentially became permanent: the original action provided a template that was easy for the government to follow. Early on, it justified the tax as necessary for the added expenses of wars, but eventually it became a stream of revenue for any and all government needs.

But it's not just taxes that follow this pattern; tax breaks do it, too. Most recently, we have the "payroll tax holiday," first enacted in 2010 (for FY 2011). This tax break was extended--following a great deal of showmanship--at the end of 2012 for two additional months and is now set to expire at the end of the month. Sold very clearly as a "temporary measure," it is fast-becoming something that is likely to mirror the history of the telephone excise tax.

On Saturday, the President--in his weekly radio address--called for another extension of the holiday:
You see, at the end of the month, taxes are set to go up on 160 million working Americans. If you’re one of them, then you know better than anyone that the last thing you need right now is a tax hike. But if Congress refuses to act, middle class taxes will go up. It’s that simple. 
Now, if this sounds familiar, it’s because we’ve been here before. Back in December, Congress faced this exact same predicament. Ultimately, thanks to your voices, they did the right thing – but only after a great deal of bickering and political posturing that put the strength of our economy and the security of middle class families at risk. We can’t go through that again. 
Congress needs to stop this middle class tax hike from happening. Period. No drama. No delay. And no ideological side issues that have nothing to do with this tax cut. Now is not the time for self-inflicted wounds to our recovery.
Nevermind that this tax holiday leads directly to an increasing debt, nevermind that the SSA is paying out more in benefits than it is actually receiving, the holiday must be extended because the situation demands it, according to the President and others. And lets not forget that the reduction amount was increased by the last extension, as well. Also, note the language the President is employing: a failure to extend the holiday amounts to a "tax hike." Given such a characterization, ending the holiday--by failing to extend it--becomes a treacherous task for any politician, as they can be attacked for wanting to increase taxes on the middle and lower classes.

Even if the holiday finally ends sometime in the near future--assuming, for instance, that the economy really starts growing--the die is now cast. Every time there is any sort of economic crisis in the future, there is a ready-made "solution" for the Federal Government: a payroll tax holiday. And make no mistake, someone will champion this idea again and--as should be crystal clear--it's just too easy to sell, even if it makes no sense.

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