Friday, the Internal Revenue Service suspended the present law Section 382 denial of loss deductions in the event of a "takeover" of a financial institution by Treasury via its investment of TARP funds. This will allow Citigroup to keep $38 b. of loss deductions.  A Treasury spokesman said Section 382 was never intended to take away losses when the takeover was by the government. True enough. Section 382 was intended to stop corporate raiders from taking over unprofitable firms just for their tax deductions of in the 1980’s. Nonetheless, this is a back door way for Treasury to capitalize financial institutions. It just goes to show, that when circumstances change dramatically, the law changes with them.  This morning’s Washington Post article lays it all out.

James Pethokoukis is on the case, putting together the pieces of a "yes."  My prediction: regardless of how urgent the need for revenue may be, taxes on the highest earners would have to go up dramatically before a VAT of any size would be passed.  Failing that, the Left's history of the first two decades of the 21st century would be that taxes on the wealthy were lowered and 2001 and 2003 and then raised on the middle class in 201x.  The Left is already smarting from what it perceives (correctly, I might add) as a similar thing that happened in the 1980s, when income tax rates were lowered while payroll taxes were increased.  They won't go in for this again unless a very large income tax increase on the highest earners is part of the bargain.

I thought this was a great segment by Bruce on Fox Business News, following up on his point about why it is a disservice to advancing a conservative agenda to keep tax cuts increases off the table:

Over at economistsmom.com, Diane Rogers does a nice job compiling some of Bruce Bartlett's recent columns.  Worth a few minutes of your time.

Today's New York Times details how the 1996 presidential election campaign created a capital gains tax cut for homeowners that came back to haunt us a decade later.  This is a rare glimpse of how some political necessity and a second best tax policy choice helped fuel the 2005 housing bubble.

Investors breathed a sigh of relief this morning when they read the Wall Street Journal's op-ed from Senator Barack Obama's (D-IL) top economic advisers, Jason Furman and Austan Goolsbee, stating explicity for the first time what top tax rates Mr. Obama would support if elected president.  The current 15% top rate on dividends and capital gains would rise to 20%, and the 35% top individual income tax rate would rise to 39.6%.  The payroll tax increase for those with earnings over $250,000 annually would not occur for at least another decade and would be between 2% and 4% of combined employer and employee tax.  Until today, most investors had expected Senator Obama to propose top rates of at least 25% on dividends and capital gains and a top individual income tax rate over 40%.  They also expected the full 12.4% Social Security and Disability payroll tax to apply to earned income over $250,000.  Currently, the payroll tax cuts off at $102,000.

Roger Lowenstein had a good op-ed in Sunday's Washington Post, "Read My Lips: We Need These Taxes."  I liked the way he started it:

Let's imagine an alternate universe. The U.S. government is running a large and growing deficit. Not far down the road it faces huge increases in Social Security and Medicare costs. Naturally, the candidates for president want to remedy this by raising revenue. They don't want us to bequeath bigger deficits to our children or stake our future on foreigners' willingness to keep lending us money.

But have you heard this speech? "My fellow Americans, I have a plan to raise taxes so that the budget will be closer to balance and future Americans won't have to worry about their retirement security." Neither have I.

That's the speech that should appeal to those on the Left.  He lists five key tax changes he would make to help close the deficit and increase equity:

This morning, Fed Chair Ben Bernanke spoke on health care at the Senate Finance Committee Health Reform Summit.  His prepared remarks cited the extraordinary growth of health care spending as unsustainable, but he cautioned against harming innovation amidst the efforts to curtail health care costs.

Okay, Stan, defender of media, explain to me how the Wall Street Journal can aspire to be a source of news if it permits this op-ed by David Ranson to appear in its pages.  It says:

Will increasing tax rates on the rich increase revenues, as Barack Obama hopes, or hold back the economy, as John McCain fears? Or both?

Mr. Hauser uncovered the means to answer these questions definitively. On this page in 1993, he stated that "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." What a pity that his discovery has not been more widely disseminated.

You'd better believe we pay careful attention to capital gains here. Friday, the Congressional Budget Office released an analysis of the rise and fall of federal individual income tax revenues from 1994 through 2004. It showed that capital gains accounted for half of the non-legislative changes to individual income tax revenues over the period. Ironically, capital gains revenues increased 0.7% of GDP from 1994 through 2000 under President Clinton, and they fell 0.6% of GDP from 2000 to 2004 under President Bush.