A FEW NOTES ON THE TAX BILL

When Opportunity Knocks

Nothing could be more designed to aid special interests than a tax bill that "must" be enacted in the last days of a dying Congress. Thus it is for the Obama-GOP agreement to extend the Bush tax cuts for an additional two years. But what President Obama and Senate Minority Leader Mitch McConnell quickly discovered was that the extension of the cuts for the wealthy, plus an additional big win for the wealthy on the estate tax immediately faced opposition from many congressional liberals. House Democrats voted in caucus not to support the agreement. Solution: the time honored approach of adding more ornaments to the tax Christmas tree in hopes of attracting the support needed for passage.

Okay, no surprises there. But, to this blogger, one ornament added that has a particularly unpleasant smell is the extension of the ethanol tax credits and the tariff that protect the U.S. corn-based ethanol against the far more efficient use of sugar as the basic crop for producing ethanol. The ethanol support program has been around for some time--subsidies, protection against foreign competition, and required use of ethanol to be mixed with gasoline. The extension now added to the tax bill is simply an effort to get more congressional votes out of the corn belt, just as extensions of a multitude of other tax credits are directed toward other votes.

There are two things about Washington's ethanol policy -- past, present, and likely the future -- that have been and continue to be objectionable. One, reliance on corn as the primary renewable crop source for ethanol has driven up significantly the price of corn. That in turn has had a rippling effect on the price of feed grains for the cattle, hog, and chicken producers which, of course, ends up as higher prices for the consumer. And as corn prices became more attractive, farmers expanded their corn acreage at the expense of other crops which in turn drove up those prices. A counter argument is that ethanol subsidies and mandated usage has cut down on oil imports. Presumably that would be felt at the gas pump but as gas prices along with food prices are going up again, it is difficult for the consumer to see the value of the supposed tradeoff.

Two, corn-based ethanol is grossly inefficient to produce compared with sugar-based ethanol. According to the research, for ethanol made from corn, one unit of energy used for the processing produces 1.3 units of energy in the fuel. For sugar-based ethanol, the ratio is 1 to 8. The greatest source for the sugar-based stuff is Brazil where sugar cane is abundant. So to keep the more efficient and cheaper ethanol out of the country, we both put a protective tariff on imports and also set a limit on the amount that can come in.

Strange Bedfellows -- Seemingly

When Republican Senator Jim DeMint, the self-annointed leader of the Tea Party (TP), and liberal, independent Senator Bernie Sanders are both opposed to the Obama-GOP tax agreement, it is something of a wonderment. But when you look at their reasons for opposition, you think, "aha, of course".

DeMint's primary opposition seems to be that the agreement doesn't do enough for the wealthy. For him it wasn't enough to just extend for two years the tax cuts for the high income earners. He wanted the cuts made permanent. President Obama, backed by liberal congressional Democrats, had originally wanted the reductions for those households earning more than $250,000 a year to expire on December 31, as the law currently calls for. And, although the wealthy are treated generously under the Obama-GOP agreement on the estate tax, DeMint wanted that tax eliminated altogether.

Sanders in an 8+ hour solo performance before a nearly empty Senate chamber said he opposed the agreement because it gave away too much to the wealthy. Contrary to DeMint, he argued that the tax reduction for those earning above $250,000 should be ended altogether and the estate tax provisions are excessively generous to those with the most money.

What should also be noted is the silence from TP activists outside of Congress. Since the TP started in early 2009, its bedrock issue has been to reduce spending and cut the debt NOW. The Obama-GOP agreement as it now stands would add over $800 billion to the deficit over the next two years and who knows that will happen after that. As evident from the so-called "temporary" Bush tax cuts which have been running for seven years, getting rid of reductions and tax credits is not easy. Where is the TP outrage? Has the so-called grass roots TP now been co-opted by the establishment GOP as the defenders of the wealthy?

There is no "in sum" or "to conclude" to end this posting. The purpose is just to air a few random thoughts that have occurred to me as the tax debate goes on.