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262 IRET Congressional Advisory 1 (2010)

handle is hein.taxfoundation/iretcgadv0259 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. February 16, 2010 Advisory No. 262 ANALYSIS OF THE SCALED-DOWN HIRING INCENTIVES TO RESTORE EMPLOYMENT (HIRE) ACT Senate Majority Leader Harry Reid (D-NV) has scheduled Senate action on a scaled down version of the Hiring Incentives to Restore Employment (HIRE) Act. The bill takes a few small steps toward improving employment, but omits the major tax reforms that could really enhance the economic recovery and promote growth going forward. The offsets chosen to pay for the bill will discourage foreign investment in the United States and reduce the competitiveness of U.S.-based multinational businesses. The trimmed version of the bill includes the Schumer-Hatch payroll tax exemption, and extension of Section 179 expensing for small businesses, an election to convert Tax Credit Bonds to Build America Bonds, and a transfer of funds to the highway trust fund to extend certain transportation programs. It would be paid for with offsets (tax increases or enhanced tax compliance provisions) relating to foreign investment accounts of American taxpayers and dividends paid to foreign investors, and a further delay in the reform of worldwide interest allocation rules. A larger version of the Act had been readied for Finance Committee consideration by the Chairman and ranking member of the Senate Finance Committee Senators Max Baucus (D-MT) and Charles Grassley (R-IA). Dropped from the bill were the extension of certain expiring tax provisions (including the R&D Tax Credit), pension funding relief, active income treatment of financial services income, extension of two economic safety net provisions (emergency unemployment compensation and COBRA health insurance premium assistance extensions), several energy credits and health care provisions, and some associated revenue offsets. These dropped provisions will be taken up at a later date, although Senator Grassley may introduce them as an amendment to the Reid bill. Analysis of jobs provisions Downturns are due mainly to weak investment, and the current one is no exception. It was triggered by the banking collapse, but weak investment was in the cards anyway because the investment spurt and increase in the capital stock made possible by the 2003 tax cuts had run their course. What is needed for a strong recovery are further reductions in the tax barriers to investment and entrepreneurial risk taking. These would involve, at the very least, the permanent extension of the 15% tax rates on capital gains and dividends, and the 33% and 35% rates in the two top tax brackets (affecting many small business owners), plus some acceleration of depreciation for businesses of all sizes. Instead, the Administration and the Congress threaten to let the 2003 tax rate cuts expire at year end for people in the two top tax brackets (which would raise the rates to 36% and 39.6% and bring back the phase-outs of personal exemptions and itemizd deductions), and would boost the capital gains and dividend tax rates to at least 20%. The minor provisions of the HIRE Act will not offset the damage done by these tax hikes on investment and small business owners. A * I 66~ 8 ~gg

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