Wednesday, October 31, 2007

Did You Expect Them Not to Increase Taxes?

Earlier this year I wrote about how the Alternative Minimum Tax (AMT) — a tax initially intended to stick it to a very few wealthy taxpayers — is now coming around to stick it to millions of middle class taxpayers. The good thing is that many politicians on both sides of the aisle recognize that the AMT is a problem. The bad news is that the main plan being pushed to correct the AMT problem would create more problems that it resolves.

Representative Charles Rangel (D-NY) has a plan that would simultaneously “fix” the AMT and lower corporate income tax rates by significantly raising taxes on investors, along with a host of other tax-raising tweaks. In this WSJ op-ed article, Rangel defends his plan as reflecting the “reality” and “painful choices” that must be made to effect tax reform.

Rangel argues that his bill is not a tax increase because the Joint Committee on Taxation has certified it as being revenue neutral. This is a favorite tactic of politicians — to claim that a tax increase is not a tax increase because it is anticipated to raise no more revenue than the current plan.

Rep. Rangel also says that his bill provides tax cuts “to some 90 million Americans.” This is laughable, because the bill only cuts a tax that these people should never have been subjected to in the first place. Most of these people are currently blissfully unaware that unless Congress acts to repeal the problem it created in 1969 and allowed to fester since then, the IRS will soon be expecting them to cough up taxes they should never owe.

In this light, economist Don Boudreaux’s comments are appropriate. Boudreaux writes:

“So, given that the current operation of the AMT is a mistake, why do Rep. Charles Rangel and so many others talk of the need to "pay for" fixing the AMT? A merchant who mistakenly overcharges customers is obliged to refund the money and stop overcharging, period. This obligation kicks in whether or not the merchant devises some way of replacing the revenue that he loses by correcting his mistake.”

The AMT reduction must be “paid for,” according to Rangel and his fellow travelers, with tax increases. He derides those that suggest that tax increases are not needed, challenging them to “to lay out a precise plan for how they will pay for the ongoing war in Iraq, the commitments to our veterans, much-needed improvements in our infrastructure. [sic] and investments in our health-care and education systems.” That’s a flowery way of saying that federal spending must necessarily increase.

Former Delaware Governor Pete du Pont replies to Rangel’s challenge in this WSJ article. Du Pont notes that tax cuts have brought in more revenue than tax increases. (The GOP likes to note this. It’s too bad that they didn’t figure out when they controlled Congress that increased revenues don’t play as well with voters as does actual spending reduction.)

Du Pont does the math and concludes that simply dumping the AMT for middle class taxpayers won’t result in revenue decreases. Although Rangel’s bill would be revenue-neutral, du Pont notes that it includes a $3.5 billion tax increase that would actually result in reduced revenues. The problem, suggests du Pont, is an ideological one. Politicians on the left believe in increasing taxes and exerting more control over taxpayers, even if it results in reduced revenues.

Rep. Paul Ryan (R-WI) thinks Americans ought to have a choice of how they are taxed. He has introduced a bill that would allow taxpayers to choose between two plans. Either be taxed under the current system as it is, or choose his proposed flatter tax plan. Under the plan, those with incomes under $100K pay 10%, and those with higher incomes pay 25%. There is a $25K standard deduction and a $3500 per person exemption. But that’s it. While there are no other add-ons, like AMT, there are also no other credits or deductions.

Critics of Ryan’s plan say that it would force people to figure their taxes under both plans in order to make a choice. This is a rather silly objection. Once taxes are figured under the existing system, anyone with a cheap calculator could also figure their taxes under Ryan’s flat tax plan in less than 60 seconds. OK, it might take two minutes if you’re math challenged.

For those that want to get rid of the IRS completely, the Ryan choice might seem like an offer to choose whether you want to be shot at sunrise or at sunset. But it probably offers the most reasonable way to actually get to a flat tax situation. Politicians have been saying for years that people won’t abide a flat tax because they will never give up their mortgage deduction (or child tax credit, or whatever). Here is a chance to let people decide for themselves.

Ryan’s bill faces a nearly impossible challenge in the current congress. He will be lucky to get any kind of committee hearing on it, let alone an actual committee vote, a floor vote, or consideration in the Senate. Rangel’s bill, on the other hand, has the backing of the House majority leadership. It is possible that it could make it through the House. It is somewhat less likely that it could survive the Senate in the form favored by House leadership. And even if it gets to that point, Pres. Bush will no doubt veto it.

That would be OK by congressional Democrats, who would then argue that the evil president refused to provide needed relief to middle class taxpayers. Many voters are not so dumb that they can’t see a tax increase through political smoke and mirrors, so this strategy could backfire. Du Pont suggests that “the 2008 elections could lead to a very different outcome, for the Rangel bill shows in which direction tax policy will proceed if there is a Democratic president and Congress in 2009.”

Here's an interesting idea. Why not drop the AMT and cut federal spending? If politicians like Rep. Rangel refuse to admit that cutting taxes increases revenues and that cutting the AMT must be “paid for,” why not cut spending to “pay for” the cut? Or are the Democrats as bad as former Rep. Tom Delay (R-TX), who insisted that there was just no more waste to cut out of the federal budget?

1 comment:

Cameron said...

PAYGO. Pay as you go. Sounds ok in theory, but in reality it seems to create a feeling of government being entitled to tax money. That's where this idea of having to "pay for" fixing the AMT comes from.