ataxingmatter

The Senate's Benefit-Reduction Plan

The Senate Budget Committee met October 26 for its final vote on the budget reconciliation package that will go to the floor for a full vote next week.  I watched a good part of the "debate" on C-Span.  It was an experience in alternative universes.  First, the Republican Chair presented a rosy chart of the constant growth of the tax revenues, due almost entirely in his account to the wonderful tax cuts that Republican federal government has enacted.  Tax cuts worked, he proclaimed, because they put money back in the hands of the wealthy entrepreneurs that establish businesses and are the heart of the economy.  He praised the work of Republicans to create sanity out of a federal government gone mad with entitlement spending, using the term "deficit reduction package" over and over again to describe this season's budget building effort.  To hear his speech, one would think that the country was operating in fiscally sound conditions, using its resources and avoiding wasteful expenditures.  Other Republican speakers repeated the "deficit reduction package" mantra.  For the first time, this universe's inhabitants proclaimed, this government is taking responsibility and working to reduce the deficit.

The minority ranking member Conrad outlined the other view of the universe second, providing chart after chart methodically decimating the "deficit reduction" claim of the majority.  He illustrated the move from surpluses under Clinton to deficits under Bush.  Noting that the future will show deficits reaching out to the horizon and growing deeper over time, he showed how the corresponding chart for the national debt reaches upward to the heavens, from our current $8 trillion to $11 trillion shortly and continuing upward, especially if interest rates increase (as they are likely to) resulting in higher and higher debt service burdens.  While the Republicans touted $35 billion in budget cuts (mostly to programs that serve the poor, see below), they disregard the bigger hole created by $70 billion in new tax cuts for the wealthy, mostly being funded by borrowing money from China, Japan and the UK, with the US looking forward to a kind of neo-colonial status as foreign countries own more and more of our assets.  (Some of this group don't even bother to disseminate on this scorer any more.  Connie Mack appeared on last Sunday's talk shows pushing multi-millionaire estate tax relief standing on a rickety two-legged stool of claims (1) that the estate tax costs people their family farms (simply wrong) and (2) that the federal government can costlessly pay for the billions in lost tax revenues by simply borrowing even more heavily from China and Japan!)

For a description of the budget bill without any acknowledgement of the two universes described above, look to the Wall Street Journal's Oct 27, 2005 article "Deficit-Cut Plan Advances in Senate" by David Rogers (at A6).

Here's another bit of the dark side of the rosy universe drawn by the majority members of the Committee.  The final budget reconciliation bill will likely provide the final authorization for opening up the Arctic National Wildlife Refuge to Big Oil's devastation, sold to the public under the promise of cutting energy prices even though it will take ten years to begin production and in spite of what we know both about Big Oil profiteering and the need for conservation rather than the pipedream of continued increases in output to meet China's ravenous appetite and our own undisciplined consumption.  This is the universe of take America's heritage from the people to give to the already rich Big Oil.

The bill will likely cut Medicare and Medicaid--at a time when more of our children have no health care whatsoever and vast majorities of the American people say universal health care should be a high priority even if it means higher taxes to achieve it.  Instead, the Senate Committee's package cuts billions from these programs, but it does redirect $10.8 billion in these Medicare "savings" (read--reduction in health care provided to the poor and lower-middle-income Americans) to increase physicians' reimbursements (a 1% increase, instead of a 4.4% scheduled cut)!   This is the universe of take from the poor to give to the rich. 

The bill will likely cut food stamps funding, at a time when poverty is increasing in this country as etched on our consciousness by the Katrina evacuees' desperate situations.  As many as 300,000 low income individuals may be denied benefits under the House Agriculture Committee's version of the food stamp cuts, while the House Energy and Commerce Committee approved billions in savings from Medicaid.  See David Rogers, House Panel Votes to Cut Food-Stamp Funding, Wall Street Journal, Oct. 29, 2005, at A4.  This is the universe of take from the poor and let them eat cake.

The final budget reconciliation bill will also likely provide another opportunity for this Congress and administration to reneg on their promise to rebuild the Gulf Coast and help Katrina's impoverished victims, the two salient priorities that Americans grasped so viscerally after the hurricane hit.  More and more, Congress is finding they need not spend as much as they had expected on Katrina's victim sor make the necessary sacrifices (bridges to nowhere in Alaska come to mind) necessary to fund wetland restoration in Louisiana.  Various projects have been proposed, from small experimental projects as described here, to vast restoration of the Mississippi delta, described in a multiple-page story in Sunday's New York Times (not yet available online).  Congress has not been willing to fund these projects, yet without them the marshlands of the Mississippi River delta are losing 25 square miles a year to erosion.    This is the universe of take from our natural resource heritage, and use it to fund boondoggles to keep current politicians in power.

Congress is also shifting the funds it has already authorized for emergency use after Katrina, as you can read in this October 29 New York Times story.  It indicates that only $2.2 billion of the White House's request to  transfer $17 billion of approved hurricane relief funds from FEMA to other agencies will be used for Housing and Urban Development programs for low-income Gulf Coast residents.  A good portion of the $17 billion redirected funds will be used by the military to repair military installations and ships (possibly done under contracts already in place with Halliburton and similar companies).  This is the universe of take from the disadvantaged, and give to crony corporations.

As the budget reconcilian process winds it way to a close, one can only hope that the current Congress will step back and realize that the decisions it makes now affect the coutry and its citizens for the long term.  If we continue to refuse to face the need for investments in infrastructure, from restoring wetlands to investing in expanding human capital through education, we will pay with an inability to compete in the brave new world of the 21st century.  If we continue to withdraw safety nets from the middle and lower classes while the boons of economic growth go almost entirely to the upper quintile we will face a social crisis of unforeseeable dimensions. 

Taxation is the way that we fund the priorities we have established for ourselves.  In a democracy, these decisions must be taken with imput from the people and attention to their demands for health care, wildlife protection, and attention to the quality of life concerns all share.  It is time for the country to deliberate about these measures, rather than holding mock rhetorical battles based on  alternative universes that share no common ground.

Framing the Issue

Aside: Please forgive the hiatus from blog activity, due to a regrettable combination of technical glitches and personal commitments.  Tax developments, of course, wait for no man or woman, so there is much to discuss. I'll begin with this post by noting the limitations in our current tax discourse, as each side frames the controversy in ways intended to prejudice the listener to the framer's ideological stance.  I'll continue next by concluding my series on the Alternative Minimum Tax and by discussing the Tax Reform Panel's proposals (and a related and astonishing interview with Connie Mack).

As the President's Tax Reform Panel comes in with proposals for drastic changes in our tax system and politicians across the country begin to stake out positions in preparation for the next months' battles over the budget reconciliation bill, the proposal for eliminating the multimillionaires' estate tax, and an additional installment on plans to eliminate taxes for the super-wealthy while shifting more of the burden to middle and lower class families, it is important to pay attention to the way that each side frames the issue. 

Stuart Levine, in his October 24th "I want an argument" blog, noted the way framing can distort a discussion about tax priorities, as revevaled in the context of the New Jersey governor race between Forrester and Corzine.  Not unexpectedly, Republican Forrester is employing the attack tactics that have served the right-wing well since McCarthy.  He frames the debate in terms of who is trying hardest to cut the most taxes.  Once the measuring stick is "cutting taxes (without regard to distributional impact)," then anyone who favors fewer cuts can be cast as supporting more taxes than the opponent.  Of course, supporting more taxes is, by the measuring rod established, automatically considered indisputably bad!

As Levine notes, the only way to fight that attack is by reframing the argument.  The goal is to engage the argument about taxes.  All tax cuts weren't created equal.  Tax cuts that put more money into the hands of the working poor will likely lead to increased spending that benefits the poor and provides a spur to the economy-- if provided additional resources, the poor will use them to satisfy their many needs; and their spending will boost the industries that meet those needs. Tax cuts that put more money into the hands of the superwealthy just add to their savings--they are already unable to consume all their wealth.  In fact, there's strong support for increasing the progressivity of the income tax rate structure by creating additional income brackets at the top for millionaires and multi-millionaires and billionaires.

Although Americans seem to be acquiescing more and more in the dumbing down of political discourse, it is to be hoped that they would actually relish a real debate about these issues rather than the sloganeering race to the tax-cut bottom that the right is pushing now.  Levine, at least, views it possible.

"I believe that American voters are capable of understanding a real debate, not a psuedo-debate that is nothing more than a string of soundbites. I believe that candidates for public office can articulate real arguments, detailing how public monies can be used responsibly and, just as importantly, favoring cutting (and raising) taxes in ways that are equitable. "

If the out-of-power Democrats continue to allow the right to frame the arguments, they will never break through the presuppositions--biases, if you will, towards particular approaches to tax policy-- that have been built into the framing.  Reframing an argument can at least allow critical policy discussions to begin.  And once those discussions deal openly, deliberately and fully with the challenges facing the nation (billions of dollars to restore the Gulf Coast hit by Katrina, and now at least another $10 billion to restore south Florida after Wilma; $5 billion or more a month sunk into the endless abyss of Iraq, in order to prepare the way for an Iranian-type Islamic state paralleling Afghanistan; billions more needed to be invested in health research to deal with avian flu; billions needed for higher education, etc), ordinary Americans will have a chance to understand the choices to be made and to make those choices more wisely. 

Framing the issues better, including being willing to talk about needed tax increases, may not be as politically costly now as it was even one or two months ago.  With Bush's political capital diminished by the scandals raging through the administration and the Congressional leadership under a similar ethical cloud (not to mention criminal indictments), there is perhaps an opening for frank talk about the economy, the needs of the government, and the disastrous consequences of the 2001-2004 tax cuts.  Even the Wall Street Journal's David Wessel has come out in print asserting the need to raise taxes. 

But if we fail to establish the policies that matter--some redistribution of large estates at death to address the increasing imbalance of resources; increased progressivity to ensure that those with the highest capital incomes pay their fair share of the tax burden--we cannot expect success to bring about greater understanding of the actual effects of legislation and greater participation by engaged citizens in tax policy choices.  Ultimately, we want Congress to enact tax bills only after sound deliberation.  We want Congress to eliminate the gimmicks (such as the sunset clauses in the Bush administration tax bills in 2001 and 2003).  We want tax legislation that appropriately allocates the costs of government among the citizenry. 

Having the courage to ask the tough questions and raise potentially unpopular alternatives is a prerequisite to achieving those goals.  Resisting the simplistic framing offered by the right-wing to bias the debates is a necessary corollary.

Gulf Zone Aid

When Mr. Bush spoke from Jackson Square in New Orleans, there was some hope that the government would set aside the "tax cut and borrow" approach that it has followed for four years and give priority to developing a sustainable fiscal policy that adequately addresses the needs of the poor.  Health care, housing, jobs--those are real needs that people in the Gulf disaster area, as well as poor families across the country, must satisfy if they are to be able to develop their potential and join the larger community as equals.  An investment of public funds in expanding human capital in the Gulf region could pay dividends long into the future for the nation.  What we need is the equivalent of the post-WWII Marshall Plan for the Gulf region.

As noted in my last post, however, it appears that conservatives will push for the same old ideas that they always push, many of them based in tax expenditures for corporations, "balanced" by reduction of entitlement programs.  Their ideas include issuing vouchers for private schools, using the tax code to provide enterprize zones, providing more tax cuts for the wealthy, and elimination of more benefits for the poor.  The hope is fading that Congress would pull back from its planned cuts to benefit programs in the face of Katrina's exposure of needy Americans.  Instead, it looks like benefit cuts will be increased to pay for the conservatives' version of disaster relief, according to this story in the New York Times.

The conservatives claim that their ideas are new, compared to the "failed" liberal ideas.  The fact is, liberal ideas haven't failed, they simply have not been sufficiently funded.  Even extraordinarily successful programs like HeadStart struggle to maintain funding.   

And the conservative ideas aren't new--they have been tried at least since Reagan's presidency.  As discussed in the last post, enterprise zones, being proposed as the cure-all for New Orleans--have de minimis effect on sustainable economic growth and job creation.  The tax incentives offered by enterprise zones mainly provide windfalls to those businesses that would be in the area anyway.  Tax cuts for the wealthy combined with benefit cuts for the poor--an additional $70 billion package of tax reductions authorized last spring and now $50 billion of benefit cuts to food stamps, Medicaid and other programs--will more likely limit growth than spur it.  We can expect as a result the further stagnation of the hopes of a population that is least able to help itself, and the further privileging of a wealthy population for whom the marginal utility of the windfall tax savings is negligible.

Katrina Aftermath (3)

Not unexpectedly, Mr. Bush has called for cuts to programs for the needy in order to fund the billions in spending in the aftermath of Katrina.  The White House proposes that hurricane relief should be funded in part by cutting Medicaid, Medicare and food stamps and a few other programs.  Apparently the rest is to be funded by more federal debt.  Don't expect any cuts to the Departments of Defense or Homeland Security, and don't expect any reasonable tax increases (or allowing tax cuts to lapse), such as eliminating the special rates on dividends and capital gains that allow the wealthiest Americans to pay very little tax on their main source of income. 

In fact, Senator Kyl (the avid proponent of repealing the multimillionaire's estate tax) wants to pass special tax legislation for people in the Gulf zone.  While you might think that the legislation would be to aid people in the lower four quintiles of income who are suffering terribly from the upheavals of Katrina, that's not Kyl's plan.  He proposes that Congress should repeal taxes on dividends and capital gains and on estates for people in the Gulf zone!  Remember that only very few estates are subject to tax, so the people aided by Kyl's proposed tax cut on estates in the Gulf would only be those wealthy people who have estates worth millions.  And the people who benefit from zero taxation of investment income are also the wealthy, for whom a large proportion of their income comes from investments rather than labor. 

Cutting those taxes makes no sense at all.  That legislation would increase the deficit and hand a tax windfall to the very wealthy. It won't create jobs.  It won't provide health care to those who have no jobs.  It certainly won't cut the budget deficit so that less money has to be borrowed for future generations to repay.  It will not do a single thing to help the people who need the help, those underprivileged, unemployed victims of Katrina who caused our hearts such anguish when we saw their suffering in the aftermath of the hurricane.  It will only increase the inequality that already threatens to undermine our democracy.  Kyl's continuing the drumbeat for more tax cuts for the wealthy is opportunism at its worst--any old crisis will do for arguing for more tax cuts for those who have, and more ignoring of those who have not.

The one encouraging sign is that there are at last voices--Republican and Democrat--opposing the foolhardiness of cutting programs for those that are the most needy while giving more tax cuts to those who need them least.  The New York Times has it right in its October 10 editorial: Tax Cuts Are Not the Priority.   The editorial comments on last Thursday's Finance Committee meeting, in which Republican Senator Grassley "accussed the White House of trying to kill his measure to pay for health care for those poor and uninsured Katrina victims who are not eligible for Medicaid." 

Meanwhile, Treasury officials appear worried less about health care for the needy and more about tax breaks for businesses--promoting "enterprise zones" where companies get big writeoffs for simply doing the business they would do anyway.   Not much of the benefit of such zones goes to the people living there.  See, for example, this statement in the abstract of a 1989 study by Dennis Zimmerman, Federal Tax Incentives for Enterprise Zones: Analysis of Economic Effects and Rationales.

"Enterprise zone residents will derive few direct benefits from the capital subsidies (money spent to buy equipment and build structures) and the labor subsidy. Although enterprise zone residents would receive some indirect benefits from the investments stimulated by the incentives and an improved tax base, land prices would increase, raising the cost of living in the area and offsetting some of the improved public services or reduced tax rates financed by the new investment." (emphasis added)

I remember when I was in practice that my law firm received some not insignificant benefits from the enterprise zone in DC in which it just happened to be located, doing activities that it would have done anyway.  It neither located there nor hired specific workers because of the "enterprise zone" existence.  It merely gladly took the tax breaks that resulted from its otherwise planned activities.  That, the Times editorial notes, is what research of existing zones suggests typically happens--wealthy investors and businesses get a tax windfall; growth and employment get at best a de minimis boost.  Meanwhile, in the Gulf Zone, we can expect that underprivileged Americans will fall by the wayside, and businesses that are struggling to stay operational because of massive losses will not be able to use the writeoff because they won't have profits to offset.   

Let's hope that more members of Congress finally get it.  They should put the Treasury's proposals for enterprise zones and Sen. Kyl's proposed new tax cuts for the wealthy where they belong--in the trash can.

Katrina Aftermath (2)--Giving back the tax cut

Hurricane Katrina is widely acknowledged to be the most expensive natural disaster ever to hit the U.S.  Unlike the 9/11 tragedy, it leveled an entire city and many small towns and villages across the Gulf region.  It will take billions to restore the disrupted lives of Katrina victimes.

One solution to the economic bind caused by the hurricane disasters and the long-term need for aide to victims is proposed at the website linked below.  It recognizes the urgent needs of the victims of Katrina, especially those who had so little before Katrina hit and were left with nothing afterwards.  It permits people to calculate roughly how much they received through the Bush tax cuts (based on their income level) and donate that amount to the victims of Katrina through one of several charities that are providing aide to Katrina victims and others who suffer from homelessness and hunger. 

Those of us at the upper income levels can well afford to give back our tax cut--we didn't need it in the first place.  This is one way to join together as a caring community to share America's wealth with those who do truly need it.  It is also a symbolic way to express disagreement with the Bush fiscal policy that continues to provide tax cuts for the upper crust while funding the Bush invasion and occupation of Iraq, and now the reconstruction funds for the Gulf coast, with a combination of borrowed funds and cuts in essential benefits and services that will be especially burdensome for those with lower incomes.

Give Your Tax Cut To Those Who Need It Much More Than You Do

Jobs Act, or is it?

Last October, the U.S. Congress passed a tax bill loaded with corporate tax breaks, the so-called Jobs Creation Act of 2004 (Jobs Act).  A prime motivation for the provision was the need to end the impasse over the export tax break that had been ruled illegal by the World Trade Organization.  In the process, lobbyists pressed for the corporate tax cut bill that they had been waiting for as individual tax breaks were passed in 2001-2003.  Congress rewarded them for their wait, passing a number of corporate taxpayer favorable provisions, especially in respect of foreign operations. 

U.S. firms pay tax on their worldwide income, subject to a credit for foreign taxes paid on foreign source income.   If high taxes in one foreign country can be used to reduce U.S. taxes against U.S. source income, the U.S. has essentially subsidized the foreign country's economy.  One way to ensure that doesn't happen is to limit foreign tax credits.  For example, a per country limitation would be the surest way to ensure that excess taxes in one country can't be cross-credited against low taxes in another country.  The Code before the Jobs Act  permitted some cross-crediting, but limited it by requiring income to be categorized in several "baskets" and generally not permitting credits associated with one type of income to be used against income in other baskets.   One of the changes in the Jobs Act was to reduce the number of foreign tax credit baskets, thus increasing the permitted cross-crediting of foreign taxes and ultimately reducing the U.S. tax liability of multinational corporations.

While U.S. companies are generally taxed on their worldwide income, there is an exception for U.S. companies that have active business operations overseas.  Those companies are permitted to defer U.S. taxes on business profits until they repatriate those profits in the form of dividends.  So long as the profits are reinvested in the active business, they are not subject to U.S. tax.  If they are repatriated, they are subject to U.S. tax at the corporate rate.  (The statutory rate is 35%, but the effective tax rate is 25% or lower for many U.S. corporations.)

The Jobs Act, however, changed the normal operation of the deferral and repatriation provisions for one year.  Arguing that repatriation of cash at lower tax rates would help U.S.companies create jobs here at home, supporters of the measure drafted a provision allowing for a one-time repatriation of overseas profits at a very low tax rate of 5.25%.

Opponents of the measure criticized it for rewarding companies that had horded profits abroad to avoid U.S. taxation, while essentially penalizing companies that regularly bring part of their overseas profits back tothe U.S. to invest in their U.S. businesses.  Those companies that bring profits back have paid the full amount of U.S. tax due over the years, while the companies that deferred repatriation until the enactment of the Jobs Act incentive will benefit from a substantially lower tax bill on those repatriated profits.  As mentioned in the Wall Street Journal article today on the repatriated cash, the lesson for the future is not hard to imagine--more companies will horde their profits overseas, waiting for another special tax break before they bother to repatriate.  Timothy Aeppel, Tax Break Brings Billions to U.S., But Impact on Hiring is Unclear, Wall St. J., Oct. 5, 2005, A1.

This is especially true since there is nothing in the Jobs Act that requires companies to create jobs in order to benefit from the low tax rate.  In fact, companies can bring the cash back to implement activities already planned prior to the enactment of the break or companies can bring cash back at the same time that they institute cutbacks in their workforces!  The repatriated cash can be used for all sorts of activities not directly related to job creation, such as debt repayment or mergers and acquisitions.  Furthermore, given the fungibility of money, the repatriated cash can effectively be used to fund stock buybacks and dividends for shareholders, even though those uses are ostensibly not permitted directly.

Has the Jobs Act repatriation cash been used to create jobs in the U.S.?    The Wall Street Journal's front page story today (see above) notes that several of the companies that are bringing home large amounts of cash are simultaneously pursuing plans to lay off workers.  An example is Colgate-Palmolive, which announced in July that it would repatriate $800 million and announced plans to lay off 4,450 people over the next four years. The Journal also noted that economist Allen Sinai, an advocate of the repatriation proposal, now acknowledges that repatriation will not create as many jobs as he had predicted, though he still suggests repatriations may create as many as 90,000 jobs a year.  Others, perhaps more realistically, say we shouldn't expect direct job creation, but should recognize that companies that pay less in taxes have stronger balance sheets and are therefore better competitors that will generally create more jobs in the future than otherwise.   

That's not much bang for the repatration tax break buck.  The Jobs Act repatriation provision is ultimately just another version of Reagan's "trickle down" economics that lets the good times roll for people at the top with the "trust me" promise that people at the bottom will eventually realize some ancillary benefits.  The claim is that the wealthy will generate economic growth that will spill over and eventually lead to more jobs. Yet periods of economic growth in the United States are increasingly marked by heightened inequality, suggesting that the benefits of growth go to people at the top and very little trickles down to people at the bottom. 

Other methods of helping people at the bottom to share in the growth might well have a much more dramatic impact and result in better quality of life across the board.  Those methods might include revitalized labor laws and minimum wage increases that permit workers who make the profits possible to share in the growth of the enterprise.  In the case of the repatriation tax break, the foregone tax revenues could have had beneficial effects on the economy in the hands of the government in terms of filtering out into the broader economy in much the same way claimed for the  re-investment of repatriated profits by corporations. For example, those tax revenues could have been used to help fund a new project to contract the rebuilding  of the Gulf area out to local Gulf businesses and thus put unemployed and underprivileged Gulf residents and victims of Katrina to work.  That would be an example of business working for the good of all Americans.

What Should Congress Do About the AMT (Part 4)

This is the fourth in a series of postings about the alternative minimum tax or AMT.  In prior postings, I have discussed the function of the AMT, its expansion to a broader segment of taxpayers due to the changes to the regular tax and lack of indexation, its origins as a backup system to the regular tax system intended to ensure that wealthy taxpayers pay at least some tax on their economic income in spite of their ability to aggregate substantial "preferences" (or tax expenditures) that significantly reduce their taxable income, and the fiscal context against which any changes to the AMT must take place, including especially the long term fiscal damage caused by the 2001-2004 Bush tax cuts. 

This posting will briefly outline the status of the current debate about AMT reform and point out some of the bills now before Congress that may come up for consideration this fall.  Among commentators, there are those who say the AMT should be repealed outright, those who argue for retaining the AMT and kicking out the regular income tax system, and those who argue for fixes to a particular area of concern. 

There is no shortage of commentators who urge the immediate repeal of the AMT, though these proponents of repeal differ widely on their goals and accompanying changes they would make. Yoram Keinan, with Ernst & Young's National Tax Office, countered my points for retention of the AMT in an ABA Tax Section publication, reprinted in Tax Notes early this summer.  Point and Counterpoint:  Should the Individual AMT Be Repealed?, 107 Tax Notes 1723 (June 27, 2005).  We both believe the tax system should be transparent, as simple as possible, progressive and should provide a safety net for ordinary Americans.  We merely envision different pragmatic solutions to the quandary of the present system.  The conservative Tax Foundation argues for repeal from quite a different perspective to Mr. Keinan, in that it wants attention to be focused on broadening the base and lowering the rates of the regular tax to the organization's preferred flat tax, non-progressive rate structure in which even those at the poverty level pay a minimum tax.  (There is almost an animosity towards single moms and the poor, as I noted in a prior post about a fairness conference.)  The President's Advisory Panel on Federal Tax Reform, of course, is expected officially to recommend repeal of the AMT.  The panel's statement this summer of its support for repeal provided no clear answers, however, for paying for the cost of repeal.  And Congress already has before it bills for full repeal of the AMT, without having considered how to offset the cost, estimated by the Center for Budget and Policy Priorities at $1.2 trillion over ten years if the tax cuts are made permanent.  Sponsors of Senate 1103, introduced  on May 23, include Senate Majority Leader Frist, Finance Chair Grassley, Ranking Finance Democrat Max Baucus, and Finance member John Kyl (who is also pressing hard for repeal of the millionaire's estate tax). 

Some commentators have argued for retention of the AMT and repeal of the regular tax. See, for example, The Economist's recommendation to treat the AMT as the opportunity for repeal of the regular tax. Not unexpectedly, these commentators are generally supportive of "flat rate" taxes that eliminate progressivity in the system and of consumption taxes that leave returns to capital outside the tax system, as evidenced in the piece in the Economist.  Since the AMT has only three rates (a zero percent rate that applies to those whose income is within the exemption amount and the 26% and 28% rates as described in the earlier post), it is closer to a flat rate structure than the regular tax.  It is also applied on a broader base, which is necessary to generate sufficient revenues when rates are flatter and lower, but that base currently treats capital gains and dividends at the preferential rate applicable under the regular tax.  One might expect most proponents of the repeal-the-regular-tax option to argue for reducing the rate on capital income to zero as part of the package, as indeed is proposed by this Roth & Company commentary.  Another commentator urging that we read the AMT's impending explosion as the knock of opportunity is Yale Professor Michael Graetz, whose proposal for (i) replacing the regular tax with the AMT as the main income tax system and (ii) adding a 10-12% value-added-tax system is also discussed in The Economist article linked above and in more detail in a report of the Tax Court's judicial conference this spring. 

Another perspective on the fringe (one hopes permanently so) of both AMT and regular tax repeal is Stephen Moore's proposal for an optional maximum 20% flat tax--the Cato Institute's ideal world would have people freely choose whether to pay any tax at all, so perhaps we should be delighted that Moore acknowledges the need for some revenues to the federal fisc.

There are also those one-issue people who would be happy with repeal or with the specific fix for "their" problem.  The best example of this group is ReformAMT, created for the purpose of lobbying for elimination of the treatment of incentive stock option (ISO) gains as an AMT preference.  Members of the group beat down the doors of Congress to tell their stories of seeing their millions in stock compensation, that they had hoped both to defer and to translate into capital gains, vanish in the dot-com bust. They think it unfair that they have to pay tax under the AMT when, after the crash, they no longer have the stock riches to back them up. Yet, these ISO recipients made millions that would have been current compensation income taxed at ordinary rates but for the special tax expenditure for ISOs in the regular tax system. While they didn't have to pay regular tax on exercise, many of them did have to pay tax under the AMT, since the AMT treats the ISO benefit as a preference.  They lost their invested compensation because they were still holding the stock (hoping to convert  to lower-taxed capital gains) when it tanked.  That's no different from the experience of many others who paid tax on compensation income, puchased stock with those dollars, and lost their investments when the stock tanked.  Congress acted reasonably when it treated ISOs as one of the goodies that it could give away too much of and lumped the ISO benefit in with private-activity bond interest and other tax expenditures that, if they add up to a substantial amount, result in more of a taxpayer's economic income being taxed under the AMT.  ReformAMT's sad stories have gotten a bill now before the House that they expect to be the package for their desired cure--guaranteeing them a refund, albeit over five years, of the AMT taxes they paid.

This, then, is the state of the discussion within Congress and among tax pundits today.  My next posts on the AMT will deal with two questions.  First, with democratic egalitarianism as our beacon, should we retain or jettison the AMT?  I will argue in a future post that a pragmatic solution could retain the AMT as a simplifying function for those ordinary taxpayers who are the special focus of fairness concerns that appropriately limits tax expenditures for those with substantial benefits from those tax expenditures.   Second, once we decide to retain the dual system, how do we prevent the AMT from engulfing ordinary taxapayers in the lower four quintiles and at the same time assure that it continues to fulfill that appropriate, tax-expenditure-limiting function?  I will argue in a future post that both AMT and regular tax reforms are required to make the dual system function properly, and that these reforms can actually further simplification and efficiency goals while making the U.S. tax system more progressive.

Tax Fairness and Distributional Tables

Tax Notes' Heidi Glenn reported on a discussion about fairness at a tax reform roundtable sponsored by Tax Analysts on September 9.  108 Tax Notes 1357 (Sept. 19, 2005).  Panelists included Scott Hodge from the Tax Foundation, Gene Steuerle of the Urban Institute, and David Cay Johnston from the New York Times.

Johnston and Steuerle seemed to push for understanding the centrality of tax fairness in thinking about the way the tax system works.  Johnston worried that a system that efficiently captures taxes from wage earners but doesn't efficiently capture taxes from business activities is not fair.  He also noted that a fair tax system shouldn't shift burdens to future generations and should make it possible for people to invest in human capital.  These comments are compatible with the concept of democratic egalitarianism forwarded in this blog.  Tax cuts for the super-rich today that are paid off the backs of ordinary Americans in the future are the ultimate in unfairness, since the super-rich don't need the cuts and those who pay the price receive no benefit.

Steuerle's comment about the importance of fairness as a foundation for democracy also caught my attention.  Whatever we think fairness means, we know that citizens must trust that their democracy provides equal justice under the law and protects the human rights that we treasure.  I have argued that this means that the tax system should shift resource allocation away from inequality and towards equality.  Consolidation of capital ownership in the hands of a few destroys democracy, and expansion of human capital investment across the polity builds democracy.

Hodge's comments, however, I find disturbing, at least as reported in Tax Notes.  He joins the radicals such as Jim Saxton and JEC staffer Jason Fichtner who argue that there is no need for traditional distributional tables as a tool in determining tax policy.  But the argument he makes seems loaded with judgmental terminology that suggests a goal of moving the tax burden from certain favored groups (not distributional groups, but "value" groups) to more disfavored groups.

He complains that the result of distributional tabulation is "sterile quintiles" that tend to polarize the middle class into those that pay tax and those that don't.  The "rising army" of single and single mom and part-time worker taxpayers (he terms at least some of these "self-serving idiots" like characters from Friends) pays no taxes, and the "statistically wealthy" middle class (analogized to Ozzie and Harriet) is left paying the bills.  But, he argues, the "middle class is a value system.  It's not a point on the income scale." Given the "punishing" effect of progressivity on the middle class, he suggests we should mitigate that effect through a flat rate tax.  With a flat tax, we can throw out the distribution tables.

This discussion suggests a callous insensitivity to the many single mom heads of households and other single taxpayers who are just barely getting by on their low incomes.  The derogatory terminology towards an entire taxpayer group compared to those who belong to the "right" value system (the Ozzie and Harriet nice, clean, white familes of four?) jars the same as former Education Secretary William Bennett's statement about abortions of black babies.

Further, the statement that  "middle class is a value system" and not a distribution of income calculation seems to imply that only those who have the "right" value system are worthy of concern when considering how to make tax policies fair.  Single moms are placed in that outcast group that neither merits our emotional sympathy nor deserves our economic concern.  "Let them eat cake" is now translated to "let them pay the same flat tax, no matter their ability to pay." 

Distributional tables are more necessary now than ever.  Remember that in the campaign to pass the 2001 tax cuts in a climate where most Americans did not place tax cuts very high on the national priority list, ordinary Americans were told that the "typical American family's tax cut" would be about $1800.  That was a misleading use of a statistic to make Americans in those lower four quintiles think they would receive a significant bonus from the tax cut bill.  Distributional tables help to dispel those misconceptions, and are an important tool for tax policy analysis.  The only problem with the current distributional tables is that they make too few distinctions in the top quintile where it really matters.  Tables should instead break down the top 5%, 2%, 1% and .2%, so that ordinary Americans have some sense of the immense incomes and access to wealth held by those at the very top.