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.
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