The Senate and House tax cut packages differ in various ways, but two major differences are noteworthy. The Senate bill, passed a few weeks ago, provides a one-year patch for the AMT that costs about one-half of the total cost of the tax cut bill. The House bill, not yet passed, would not include any relief for the AMT. Instead, it would extend the Bush tax cuts for capital gains and dividends for two more years (2009-2010) beyond their current expiration date of 2008. So the Senate is trying to help the upper middle class that might be hit by the AMT (especially those families earning more than $75,000 and with two or more dependent children), and the House is trying to help the very rich who earn a hugely disproportionate share of capital gains and dividend income.
Edmund L. Andrews describes the two positions in his "inside the news" piece in the Sunday times (BU 3) entitled "Hmmm. What's This Alternative Tax? Hey, Wait! Ouch!" He reports, as we have previously discussed, that both bills favor the wealthy, though the Senate bill "not nearly as much." He speculates about the rationale for House Republicans supporting "tax changes that seem like a recipe for political self-destruction." Taxpayers paying the AMT would "shoot from 3.5 million this year to 18.9 million in 2006." At the same time, "51.3 percent of the House bill's tax package would flow to the top 1 percent of filers, people with average annual incomes of $1.1 million. Put another way: half the entire tax cut would go to about 1.4 million households."
His conclusion is that House Republicans are not just seeking revenge against Democratic-leaning states (though the "blue states" will suffer most from no AMT provision because they have higher tax burdens and higher concentrations of wealthy people). Instead, he notes it is all just tactics. Leaving out the capital gains break for the wealthy got the tax bill through an otherwise recalcitrant Senate. Passing it in the House will permit a reconciliation process that has the capital gains cut in it and will require only a simple majority rather than the 60 votes otherwise needed to stop a filibuster. So the Republicans plan to pass the capital gains and dividends break for the wealthy no matter what.
Note that this comes when a flood of dividends and share buybacks from record corporate profits have enriched the wealthy investor class enormously. See Ian McDonald, Dividends, Buybacks Set New Benchmark for Largess, Wall St. Journal, Nov. 28, 2005, at A1. (The same story notes that the big driver of these huge corporate profits isn't new entreprenuerialism that promises long-term economic growth for everybody; instead, it is further cost-cutting.) The average payout is $1700 for every person in the United States, but of course most of that doesn't go to anyone in the lower four quintiles of the income distribution, so the actual payout to each wealthy investor is substantial. And this Congress wants to make those payouts (often out of untaxed corporate profits) continue to be preferentially taxed at very low rates into the future.
Congress should let the capital gains and dividends tax cut die a natural death. It is a boon for the wealthiest of the wealthy and will only increase the chasm between the well-to-do and ordinary Americans. It is poor policy and has nothing to do with stimulating economic growth. If anything, it rewards the kinds of activities (job cuts and benefits reductions) that allow companies like Wal-Mart to build up immense company profits and pay their executives lordly salaries while their ordinary employees struggle to make ends meet on starting salaries of less than $7 an hour, with no benefits.
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