ataxingmatter

Becker and Posner on Tax Evasion: A TaxProf discussion

Becker and Posner engage in an interesting discussion today of the economics of tax evasion on the TaxProf listserve, asking why there is such good compliance and not so much tax evasion as a rational homo economicus would suggest.  Becker, of course, was one of the first to apply  cost-benefit analysis to crimes.  I've always been rather dubious of those economic analyses, because it is so convenient to set the assumptions to produce the desired outcomes, and forget inconvenient externalities. In spite of my skepticism about the results of economic analysis, I find that it sets an interesting framework with which to approach an issue, that can shed interesting light on human behavior and critical factors in making policy decisions.

Becker concludes that audits, sanctions and other deterrence merits do affect compliance rates, but are not alone able to account for the fairly high compliance rates among advanced countries.  He concludes that it may well be that an exogenous factor is operating--a sense of moral duty to pay one's taxes.

Posner, predictably, disagrees with that conclusion.  He claims that there is more to deterrence than meets the eye, especially since information about the best ways to evade taxes is hard to come by for most people.  Adding the information costs to higher costs to evasion than Becker assumes--audits aren't random, once audited a future audit is more certain--means there is less of a gap than Becker considers.  But those arguments are only tinkering at the edges, which Posner essentially admits when he puts forth is third argument.  Here's the excerpt from his concluding argument.

Every dollar spent by the Internal Revenue Service on enforcement brings in several dollars in additional tax revenue, suggesting that an expansion in the IRS’s budget would be necessary to equate the marginal benefits of tax enforcement to its marginal costs. But this suggestion ignores the fact that the benefits are, as a first approximation, merely income transfers, whereas the marginal costs of tax enforcement are social costs. If taxes are evaded, the resulting shortfall in tax revenues is made up by increasing the tax rate, and there is no social loss unless the increase has worse misallocative effects than the evaded taxes would have had, had they not been evaded. One reason, therefore, that tax evasion is widespread is that it may be cheaper from an overall social standpoint to have slightly higher tax rates than to devote additional resources to law enforcement, though the first-best solution might be stiffer penalties, especially monetary penalties. Deliberately lax enforcement would then explain the amount of evasion.

Now, I find this last argument questionable for all sorts of reasons.  First and foremost, the idea that whenever tax revenues fall short because of tax evasion it is a simple matter to merely raise the rates and recoup the lost amounts, resulting in "no social loss" strikes me as absurd, in the US at least.  Raising rates is politically extraordinarily difficult, because right-wing groups (and their expensive lobbyists and think tanks) have pushed tax cuts as the panacea for all social, moral and economic problems for decades.  In fact, tax evasion plays into the right-wing agenda for starving the government "beast" of funds, resulting in the type of argument frequently made by Jim Saxton's reports for the Joint Economic Committee that evasion of a tax is a justification for eliminating the tax, not for squelching the evasion.  It is relatively easy to convince ordinary people that any tax increase--even one that has not realistic possibility of falling on them because it is targeted at high-income taxpayers--is a bad idea, since about 40% of the American electorate think they are in the top 5% of the income distribution.  And of course, the rhetoric has for so long been focused on labelling government as an "other" that is bad and privatization that puts public goods and public needs into private corporate hands as unambiguously good, making the possibility of raising rates to compensate for evasion even harder.

But are the benefits of tax enforcement merely "income transfers" while the costs of tax enforcement are clearly "social costs", as Posner claims?  I don't think so.  Tax enforcement has important institution-reinforcing value, as citizens are encouraged to think of themselves as citizens who participate together in government to provide for the common good in ways that each individually cannot do.  Good tax enforcement encourages those who do comply out of a sense of moral duty to continue to do so, while lax enforcement results in some feeling like they've been snookered into complying while others live high on the hog from their evasive gains. Since nobody likes to be played for a fool, lax enforcement and visible cheating  tend to weigh against the sense of duty to the democratic system and fellow participants.  In other words, there are social benefits from appropriate enforcement that go well beyond the mere income transfers that it achieves or even the good uses to which tax revenues are put, one of which is the reinforcement of the shared sense of moral duty to support the common good.

I think one of Posner's problems is that he looks through a very narrow window that sees the compliance/evasion issue--and even the question of moral duty--as a question of obey or disobey the law.  That misses the deeper and more profound concern that I think at least partially underlies our compliance with tax laws--the acceptance of a shared core set of values and institutional priorities.

Fred Thompson's Tax Plan

Fred Thompson, one of the candidates for the Republican nomination for president, has proposed as his tax plan a proposal for a two-rate (almost flat) tax similar to that introduced by the conservative Republican Study Committee, a House-based group, and similar to a "dual rate income tax" proposal discussed by the Chris Edwards at the Cato Institute in Feb, 2005 in its analysis of Options for Tax Reform. See Marc Santora, Thompson Calls for Option of a Simplified Income Tax, NY Times, Nov. 26, 2007.

The proposal would allow people to choose to continue to pay tax under the current system or to pay tax under a two-rate system--10% on income up to $100,000 on joint returns, 25% on all income exceeding that amount.  Adding an optional system complicates, even if the optional system alone might be simpler, in spite of the fact that proponents of the "option" may claim simplification as a goal.  See, e.g., this posting on the Atlantic.com blog discussing Thompson's proposal as simplifying the tax system.  Along with the dual-rate stsructure, Thompson would repeal the estate tax, repeal the alternative minimum tax, lower corporate rates considerably, permanently extend all the Bush tax cuts, permanent extend more expensing for businesses, and adjust depreciation schedules (presumably providing even more upfront deduction for long-term assets).  All those items are on the conservative right's wish list for a world where businesses rule and government plays hardly any regulatory or institutional role.  They wouldn't be costless--the expected revenue reduction from the proposal is at least in the range of two and a half trillion dollars over ten years (AMT repeal alone costs about a trillion over ten years), though Thompson quibbles with those estimates and claims that tax cuts can almost pay for themselves. 

With those kinds of reductions in revenues, the state would either have to borrow even more to keep funding government activities or cut back.  Since many of those who support flat tax systems without progressive rate structures want lower taxes for upper income taxpayers and less revenues for government in order to shrink government, a reasonable expectation would be that the decision would be to shrink government.  Likely cutbacks would be social security and medicare (and any other program that is labelled an "entitlement" ).  See   Amy Schatz, Thompson Unveils Plan for Flat Tax, Wall St. Journal, Nov. 26, 2007.  And Thompson's office has admitted that it would require reducing Social Security benefits at the outset and reducing the way Social Security increases are calculated (tying to inflation rather than wages). 

Schatz suggests that such a plan wouldn't "play well" with senior citizens.  But if we care about democracy, shouldn't such a plan raise concerns for all of us, not just senior citizens?  It seems to move the "greed is good" syndrome that dominates the US today even further along its path to destroying the progressive consensus built especially during the Roosevelt post-depression period that those who are making it owe a decent measure of support to those who cannot make it (for whatever reason) or who are no longer a part of the system able to benefit directly from wage growth paralleling productivity growth.

Wal-Mart can't hide its tax avoidance planning documents

In North Carolina, a case against Wal Mart has been going along for some time.  The state attorneyh general has posted a number of documents in the tax dispute, including many that reveal its use of Ernst & Young, its outside auditor, to design for it complex strategies to cut its state tax bills.  It ended up using one of them (at least)--the "captive REIT" strategy that purportedly allowed Wal-Mart to transfer ownership of its properties to a captive REIT (that's a real estate investment trust--supposed to be owned by many little investors, but various big corporations have figured out how to have a 100 very little guys but own the rest themselves) and then pay rent to the REIT and take a deduction for tax purposes even though the rent didn't leave the corporate till.

Wal Mart complained that having the E&Y documents public caused "unreasonable and undue annoyance and oppression".  The judge didn't buy it--he decided on Nov. 20th that the documents could stay public.

That's the right decision.  There is a public interest in knowing what kinds of schemes corporations are using to avoid taxes: public shaming can't happen unless the public knows. 

Tony Judt on Robert Reich's book Supercapitalism

The 12/6 New York Review of Books has an interesting review of Robert Reich's latest book, Supercapitalism: The Transformation of Business, Democracy and Everyday Life.  According to Judt, Reich contrasts the post-world war II master narrative with today's economic efficiency narrative.  The old narrative relied on the state to protect the economy from foreign competition, standardize products, reuglate, subsidize, and provide price supports and guarantees.  "The natural inequities of capitalism were softened by the assurance of well-being and future prosperity and a widespread sentiment, however illusory, of common interest."

Beginning in the mid-seventies, however, a new master narrative has taken hold.  This one, based on technologies like computers, satellites, the internet, has eased away regulatory structures and placed increased emphasis on global mkarket competition and funds chasing lucrative investments wherever they may be. In this "Wal-Mart and Wall Street" economy, "prices and wages are driven down, profits up. Competition and innovation generated new opportunities for some and vast pools of wealthy for a few; meanwhile they destroyed jobs, bankrupted firms and impoverished communities."  In effect, the greed is good mentality has made increase in productivity the single measure of the good, and any interest in the common good has disappeared.

Are the entrepreneurs who create this wealth deserving of credit?  It's easy to be an entrepreneur when tax breaks, pension guarantees, safety nets, superfunds and bail outs protect savings an dloans, hedge funds, banks and others, giving all the bneefits to private investors and all the risks to taxpaying public.

Reich seems to conclude that all this is inevitable, that somehow people split off their "citizen" values from their investor/consumer values to enjoy the good life made possible, in spite of social upheaval, environmental degradation, and the collapse of the safety net for many ordinary people.

Judt disagrees with this tehcnological determinism "framing assumption" that our interests as investors/consumers have triumphed over our capacity as citizens.  It doesn't explain why only American citizens are trapped in this paradox, while others have begun to do something about the problems.  Judt sees it as stemming from Reich's "epistemologically thin view of society: by 'citizen' he means no more than economic man and enlightened self-interest."    Judt also questions Reich's notion of an "ineluctable dynamic of global economic competition."  The productivity growth economic dogma  disregards factors important to human existence that are not readily subsumed into productivity growth, resulting in an ideological "worship of productivity and the market." 

Judt says Reich avoids the real questions.  The reason ordinary people may be confused about something like global warming is that it is both a consequence of economic growth and a contributor to it.  If growth is good and global warming bad, how to choose.  The problem, of course, is that we need to consider when growth may not be good.  "Whether contemporary wealth creation and efficiency-induced productivity growth actually deliver the benefits they proclaim--opportunity, upward mobitility, happiness, well-being, affluence, security--is perhaps more of an open question than we are disposed to acknowledge.... We should consider the noneconomic implications of public policy choices."

This echoes much of what I have been arguing in this blog.  Democracy is not something that can be taken for granted.  A public philosophy that considers only economic efficiency will be content with a society in which the better off get getter and the rest stagnate.  Yet that society will be highly unequal and will forego any societal belief in the idea that those at the bottom deserve the support of those better off than they.  Judt looks at welfare reform, which "returns us to the spirit of England's New Poor Law of 1834," showing concern only for the meritorious poor; and privatization, in which market optimization has displaced social and political evaluations of public policies, leading to the breaking up of public and collective action in favor of fragmented and privately held assets (including the mails, which aren't generally profit making without a subsidy, and prisons, which give a one-time gain to the public at the cost of future income and control).

Judt notes that the result of these efficiency based policy choices in welfare reform and privatization,k deregulation, and globalization, has been to reduce the importance of the state.  And in so doing, the market has taken on an importance that it cannot bear well without the hand of the state to regulate and ensure "the noncommercial institutions and relations--of cohesion, trust, custom, restraint, obligation, morality, authority."  The result is a threat to democracy itself.  Having devalued public action, we have no clear idea of what we have in common.  Many people are left out, and the good ride may not last even for those who are now at the top.  It may be that the best answer to globalization will be a rediscovery of the value of the state as the only actor with sufficient resources and authority to provide necessary social services and restrictions on inequalities of income and wealth to give public cohesion and confidence.

More on the Senate Hearing on the Uncertainty of the Estate Tax

In an earlier posting, I reported on the November 14 Senate Finance Committee hearing on the estate tax.  In particular, I focused on the misleading comments in Senator Grassley's release and the testimony of a "small" business owner (if you think a business worth a billion is small) that repeated the just plain wrong arguments used by those lobbying against the estate tax.   Again, family farms and small businesses just aren't lost to the estate tax except in the rarest of cases.  There are all kinds of things preventing that--from the huge exemption amount that isn't taxed at all to the ease with which prospering small businesses can take out loans to cover whatever small amount of estate tax is due.  Most estates don't pay any tax, and only the biggest estates owe any significant amount of tax at all.

There's a good article on the hearing on the OMB Watch website today:  Estate Tax Repeal No Longer On the Table, OMBWatch, Nov. 20, 2007.   That posting discusses in particular Warren Buffet's testimony in favor of retaining the estate tax.  Buffet supports some reforms to remove the uncertainties caused by the crazy sequence of provisions enacted as part of the wacky Bush sunsetting scenarios--an estate tax exemption that increases year by year for a decade, coupled with a estate tax rate that decreases gradually from 55% to 45%, all to result in repeal for one year in 2010, with reinstatement in 2011 of the 2001 estate tax scheme with a $1 million exemption and 55% rate.  Nutty, from the beginning. 

The Bush scheme expected that, just about now when people would really start complaining about the uncertainty of being able to plan to avoid paying taxes, Congress might agree to give the wealthiest taxpayers in the country a big break by making the 2010 provision permanent.  Luckily, the 2006 elections made that at least less likely, as Congress is beginning to realize that a $20 billion or so chunk of funding can do a lot of things that the government wants to do.

What kinds of reforms may make sense?   Buffet suggests some reform to adjust the exemption levels to an appropriate amount (probably slightly higher than the 2001 exemption amount) but increasing the rate for those at the top to make that change revenue neutral. Buffet shares my concern about a growing risk of plutocracy, which means a higher rate of tax on those at the top is one more way to help to blunt the force of inequality that gives wealth to wealth and power to those that have wealth.

Mercer's Worldwide Individual Tax Comparator Report

Mercer's Worldwide Individual Tax Comparator Report compares the after-tax take-home amount (considering "personal" and social security tax--apparently including state and federal income taxes for the US) for single, married without children and married with 2 children in 32 countries. 

One thing pops out in this report--it shows that the US tax system favors married taxpayers with children over single taxpayers, ranking 11 out of the 32 for married with children and tied with several at 14 out of 32 for singles.

The US is not the lowest tax rate country in the study but it is by no means the highest.  The United Arab Emirates, Hong Kong and Russia have the lowest tax, while European countries are at the highest rates.  For single taxpayers, the US tax rate as calculated in this study comes out at just slightly more than 29%, whereas most european countries have higher tax rates. (The UK is almost exactly the same as the US here.) For married taxpayers with two children, the US tax rate as calculated in this study comes out at just under 21%--only 11th from the bottom rate country which is the United Arab Emirates with 5%.

What this study shows, like so many others, is that our effective tax rates are actually quite low. Too low for our own good, perhaps, since we don't have the funds to pay for the government services that we provide and we don't provide services that many of our European friends take for granted, like universal health care.   

CRS report and AMT reform

  The Congressional Research Service has issued a report (available on TaxProf blog) on the Rangel tax reform legislative proposal.  This proposal would eliminate the AMT and offset that with a combination of revenue raisers.  The most important revenue raiser would tax adjusted gross incomes of high income taxpayers with a surcharge--effectively creating a method within the regular tax system for additional revenues from higher income individuals while providing relief for those in the lower income distributions that would begin to feel the pinch of the AMT unless there is some change.  As the CRS report shows, the surtax on adjusted gross income works against the preferential tax rate for capital gains, as the original AMT did.  There was an AMT adjustment for capital gains until the 1986 tax reform eliminated the capital gains preference.  When the capital gains preference was reinstated a short time later, the AMT adjustment was not reinstated.  For more background on the AMT, see the JCT report, Present Law and Background Related to the Individual Alternative Minimum Tax, March 2007, available here, and my article, here.

Republicans in Congress have not supported the proposals.  In fact, there are a number of Republicans who have suggested that a revenue reduction bill eliminating the applicability of AMT to upper-middle income taxpayers must be passed without an offsetting revenue raising provision at all--i.e., the very high income taxpayers who received the primary tax reductions from the 2001-2003 bills should keep receiving those reductions and the upper-middle class should receive a further tax reductions, all to be paid for by additional borrowing.  Kent Conrad released a cogent statement in response to that argument, available here. 

I hope Congress deliberates appropriately before passing an "AMT Patch" that will provide tax reductions to all potential AMT taxpayers, including those above $200,000 annual income.  If it thinks about what it is doing, surely it won't just borrow more money to give another tax break.  Those tax reductions should be offset by reasonable revenue raisers, such as the ones Rangel has proposed.

The Eleventh Circuit overturned the Tax Court in Estate of Frazier Jelke III to permit an estate to reduce the value of a stake in a corporation by the current value of the built-in tax liability on the gain in the corporate assets, as though the tax were due today rather than at some time in the future.   The corporation at issue is an investment company.

The commissioner's expert had calculated a $21 million present value for the built-in capital gains tax liability, discounting the discount for the tax liability based on projections of when the assets would likely be sold based on their terms (a trust could not be liquidated for 20 years, for example).  The estate argued for a dollar-for-dollar valuation discount for the tax liability, without using time value of money concepts to determine the present value of the liability, as the Fifth Circuit had (erroneously in my view) approved in the 2002 Dunn case.  The Eleventh Circuit found that analysis "simple yet logical" and thus chose to go along with those precedents even in a case involving a very small minority shareholder. This case demonstrates the courts' inability to understand that they are providing an unwarranted windfall to estates by their unwillingness to apply time value of money concepts that would be applied by actual buyers of such assets in determining how much they were willing to pay.

The Tax Court had in fact applied a thorough analysis.  It considered it unreasonable to assume immediate liquidation on sale of the stake--in fact, to assume liquidation, as in the Fifth Circuit Dunn case, would be arbitrary and inconsistent with the investment company's history.  This is especially true for a small (about 6.5%) interest, compared to the majority interest at issue in Dunn.

The Eleventh Circuit delves into the history of General Utilities repeal, which involves distributions of asset in liquidation to avoid corporate tax at the distributing corporate level, prior to the enactment of section 311(b)).  Prior to that time, valuations wouldn't take future tax liabilities into account unless sales were imminent.  But the court says the new rules made courts aware of the need to provide a discount for tax liabilities, since now the assets heldl by a corporation the stock of which was held by the estate would be subject to tax at some time in the future upon liquidation of the corporation.  The Commissioner had resisted allowing any discount for this future tax liability unless the tax was imminent.  In a 1998 case, the Tax Court first allowed a discount (as part of the "marketability discount") for contingent tax liability.  The Second Circuit, in Estate of Eisenberg, allowed a discount for contingent tax liability when a taxpayer owned 100% of the shares of a corporation that owned a single commercial building.  Then in Estate of Welch, the Sixth Circuit also allowed a discount for contingent tax liability.  Note, though, that these cases all concluded that some discount should be allowable, as would be the case in an arm's length sale of most corporate stock.   Then in Dunn, the Fifth Circuit, in the case of a sale of about 62% of the stock, disagreed with the Tax Court's determination of allowance of a discount of about 5% of the future capital gains and provided a discount for the full amount of an immediate tax on built in gains under a constructive liquidation test.   The Fifth Circuit ruled that this constructive liquidation must be applied as a matter of law to determine the appropriate estate value.  Why that test?  Because the Fifth Circuit concluded that a stock buyer must necessarily be treated as buying the stock to gain control of a company for the sole purpose of acquiring the underlying assets of the company.

Now, folks, this has got to be the wrong answer.  Everyone who has handled stock sales knows that buyers and sellers will make present value analyses and then negotiate from there.  Some buyers want to liquidate the company and get direct control of assets.  Many buyers do not.  The actual discount to the sales price for the future tax liability inherent  in corporate assets will depend on a number of factors, but it clearly won't be a dollar-for-dollar discount unless and until a taxable liquidation is inevitable.   And someone who doesn't get control of a company can't possibly force a liquidation, even if that person would like to do so. The courts appear to be applying a pro-taxpayer sentiment that has little to do with the real world.

The justification for this, according to the Eleventh Circuit, is that it permits the dawning of a new era of "valuation certainty."  Now folks, valuation certainty is nice, but not a panacea when it operates to give an untoward advantage to taxpayers that is clearly not merited on the facts.  And especially not when certainty could be achieved just as easily by requiring estates to value the tax liability at a discounted rate determined by the applicable federal rate over a term that is reasonable considering the nature of the investments and the terms of the financial instruments held.

What is perhaps most disconcerting about this is that the Eleventh Circuit does all this claiming that it is applying an "economic reality" approach.  It disregards the Tax Court's consideration that a small shareholder cannot force liquidation of the investment company .  It then goes on to talk about its per se assumption of immediate liquidation.    It claims to apply a "willing seller-willing buyer" principle that does not permit discounting of the net asset value for the likely delay in selling assets--because it is a "hypothetical" willing buyer (and not an economically reasonable willing buyer, apparently):  the court explains that its hypothesis about a hypothetical buyer includes the assumption about immediate liquidation!  This is economic nonsense, not economic reality.

Social Security

Paul Krugman had an interesting op-ed in the November 16, 2007 New York Times about  the general Washington political discussion of Social Security, "Played for a Sucker."   

Krugman's first point:  doomsaying about Social Security--along the lines of "it won't be here for the next generation"--has become quite common inside the beltway, as in a recent Russert-Matthews exchange on the program "Hardball." 

Krugman's second point:  the conventional "inside the beltway" wisdom on this is simply wrong.  The fiscal issues facing the United States on the retirement of boomers are not caused by demographic change but by the enormous growth rate of per capital health care costs.  See articles by Peter Orszag and Philip Ellis to this effect, in the New England Journal of Medicine, here (claiming fiscal condition misdiagnosed--it's health care costs, not demographics) and here (suggesting some ideas for constraining rising health care costs).

Krugman's third point:  the misconception about the source of the costs has been a concerted campaign by "conservative ideologues whose ultimate goal is to undermine the program."  Thus, scaremongering about the impact of demographic change on the viability of the safety net has been used as a reason for undoing the safety net--privatizing the program and putting the risk of failure on the individual retirees rather than on the public system.   (How tossing the safety net out the window is saving it has never been adequately explained by the proponents.)

(Readers will note that this tactic is fairly common when it comes to working tax systems as well.  Ideologues who think no tax is a good tax argue that the tax system doesn't work well, and then they argue that the cure is to remove the sick body rather than to make the body whole--eliminate the tax.  This argument has been used, in one form or another, as justification for repealing the corporate tax and lowering rates (with an eye to eventual outright repeal) of capital gains taxation.  On the other side, people who claim they care about progressivity argue for a progressive cash-flow consumption tax. But, my friends, I fear it is highly unlikely that any consumption tax to replace an income tax would be enacted in progressive form and highly likely that any consumption tax enacted would have numerous loopholes (such as nontaxation of borrowed funds) that leave the rich even richer and ordinary taxpayers supporting what government programs are needed after the wealthy take care of themselves in gated communities.)

Krugman's fourth point is worth pondering.  Partisan politics--basically, ideology wearing a mask of sound political thinking--may have gotten so bad that progressives need to be wary of making the mistake of assuming that they can do business in Congress by rising above it.  If you talk too much about transcending partisanship, you may just be a sucker for playing into the hands of the worst partisanship imaginable--the "privatize government" ideologue game that has been going on for the last 7 years.

AMT legislation hits snag in Senate

As most readers know, the House passed a progressive one-year patch for the AMT, H.R. 3996.  In that bill, the AMT exemption was increased significantly for one year, offset by a number of tax provisions that primarily impact upper-income taxpayers by clawing back some of the excessive benefits rovided under the 2001-2003 tax cuts.  The result would be a more progressive tax system.

But partisanship in the Senate seems set to derail that responsible reform.  See, e.g., this article from the Hill by Jessica Holzer: Senate GOP Coordinates AMT Attack" (Nov. 10, 2007), noting that the GOP Senators are using the veto threat of a widely disliked President to try to ram through legislation that borrows money for a tax break for wealthier Americans rather than paying for the legislation with provisions that actually increase the fairness of the tax system, such as taxing hedge fund managers' compensation the way every other wageearner is taxed. 

(Of course, there are those integrity-challenged Democratic Senators from the Northeast who are having trouble with the idea of making mangers that earn hundreds of millions a year pay income tax at ordinary income tax rates on their compensation--they blather on about worrying about the effect on the economy of taxing these people on their take home pay, and we all know that is nuts.  What they are really worried about is losing the donations to their campaign chests.)

Remember that the 2001-2003 tax cuts were passed with several phony gimmicks to make it look like the revenue reductions benefiting wealthy Americans were not coming on the backs of ordinary taxpayers.  The chief gimmick was a sunset provision, that allowed Congress to pretend that the massive revenue reductions enacted wouldn't really harm the federal fisc because the impact was countermanded by restoration of the original tax structure in after 2010.  The second gimmick was retention of the Alternative Minimum Tax, which Congress knew would begin to "claw back" the revenue reductions, especially for the upper levels of the middle class, very soon after enactment.  Those two gimmicks were necessary to avoid having a fiscally disastrous long-term budget outcome.

Now, of course, the Republicans are hoping to reap the benefit of their gimmicks by arguing that letting the 2011 tax restorations to take place(that they enacted into law in the first place) would be a Democrats-imposed tax hike!  They want to have their pie and eat it too.  In this case, the "pie" is tax cuts for the wealthiest taxpayers, from the capital gains cut to treating dividends as preferential capital gains to reduced rates for the top brackets.  The "eating it too" is doing those cuts in spite of the tremendous impact on the revenues available to the government to fund government activiites, including the trillions of military costs (for actual appropriations as well as needed funding to replace used up military supplies).  And on top of that, they want to pretendthat they are also friends of ordinary taxpayers, by thwarting passage of an AMT patch unless it is treated as costless. 

The House passed a responsible bill that provided AMT patch relief by delaying a tax benefit passed for multinationals (world wide interest expense allocation) and eliminating the preferential treatment of the compensation income of hedge fund managers, among other things.  The Senate had hoped to pass a similar bill, but Republicans have derailed it.  Republican leaders refused yesterday to go along with a Senate plan to call the House bill for a vote.  And negotiations today have failed to reach a solution.  Senators are likely to be unwilling to fight for appropriate financing of any AMT patch.  That's a shame, because it would mean that the distasteful gimmicks used by the Republican Congress in 2001-2003 will have succeeded in accomplishing their goal of pretending to behave fiscally while actually intending to behave irresponsibly.  With an election year fast approaching, Senate Democrats should think twice about letting the Republicans set the agenda in this way.   

As Citizens for Tax Justice notes in "Congress and Public Face Start Choice on AMT," it would be a major setback if the Senate undermines the "pay -as-you-go" provision to provide AMT relief for upper class taxpayers without an offset provision.  That would amount to just another tax package favoring the wealthier amongst us, since the main beneficiaries of AMT relief earn from $84,000 to about $500,000 a year (i.e., the top quintile, except for the very top one percent).

But the Republicans in Congress aren't happy with that.  They want to extend the Bush tax cuts, again without appropriate revenue raisers, pushing the country into deeper deficits long into the future with AMT and Bush tax cuts going primarily to the well-off.  Reid spokesperson Manly has it right when he notes, in the Hill article cited earlier,

“The reality is that Republicans are not only blocking attempts to provide AMT relief but, audaciously, many are demanding additional tax breaks for the wealthy as a price for passing AMT relief. This is cynical politics at its worst,” he said.

See, for example, this April 2007 Republican policy statement, suggesting that the need to pass another AMT patch (admittedly costing at least $132 billion over two years) should be an opportunity for making permanent the preferential treatment for capital gains.  Almost all the benefit of the capital gains preferential rate is enjoyed by the wealthiest of taxpayers, so this is an unalloyed attempt to make the income tax even less progressive and more favorable to the wealthy.  As Warrent Buffet said at the Finance Committee's estate tax hearing, that is not the way to go, unless we want to turn our democracy into a plutocracy.

Or, as CTJ puts it:

  It's worth remembering that the particular tax cuts Republican leaders are most enamored with almost exclusively benefit the wealthy. For example, a key cut lowered the rate for dividends (which were previously taxed at ordinary income rates) and capital gains (which were previously taxed at an already low 20 percent) to 15 percent. Capital gains and dividends should both be taxed at ordinary income rates. CTJ's estimates have found that the lower rate for both cost around $92 billion in 2005 alone and about three fourths of the benefits went to the richest 0.6 percent.

CTJ notes that making the temporary Bush tax cuts permanent would cost about $5 trillion over 10 years, which even Bush economists have admitted do NOT pay for themselves in economic growth.