House Democratic leaders, in an effort to upstage Republicans on the issue of tax cuts, are preparing legislation that would permanently shield all but the very richest taxpayers from the alternative minimum tax, which is likely to affect tens of millions of families as early as next year if it is left unchanged.
Here is more. Of course this rather non-egalitarian policy, very costly in terms of revenue, is the Democratic attempt to reward their wealthy urban and suburban supporters. One response — common in the contemporary blogosphere — is to press the Democrats to become more and more "progressive." Another response, more popular on MarginalRevolution.com, is to accept modest aspirations for politics and look to entrepreneurship, trade, and productivity growth for progressive gains.
It was ugly what years and years of power did to the Republican Party. The particular interest groups will differ, but I do not understand why the progressives expect anything better from the Democrats.
“attempt to reward their wealthy urban and suburban supporters”
Many of these supporters are residents of states that are net exporters of cash to the federal government, benefiting poorer (often Republican leaning) states. AMT relief would help end these subsidies, allowing us all to “look to entrepreneurship, trade, and productivity growth for progressive gains”.
“Of course this rather non-egalitarian policy, very costly in terms of revenue, is the Democratic attempt to reward their wealthy urban and suburban supporters.”
Since the original purpose of the AMT was as a counter to aggressive tax
sheltering, a non-egalitarian activity by nature, this comment
makes very little sense.
I’m as confused as save_the_rustbelt. You just have to keep reading the NYT article to get to this passage:
“The alternative minimum tax was created in 1969 to prevent millionaires from using loopholes to avoid all federal income taxes… but the tax is expanding at a rapid pace, partly because it is not adjusted for inflation. It can hit people with incomes as low as $50,000 and if left unchecked is expected to affect 23 million households during the 2007 tax year — up from 3.4 million last year.”
AMT reform is a perfectly progressive platform item. It’s an attempt to make the tax code more, um, progressive.
Depending on certain details, it occurs to me that this might also “reward” the relatively poor in wealthy and high cost of living states.
1) The regular income tax allows deduction of state and local taxes; the AMT does not.
2) All things being equal, elminating the AMT might therefore result in higher state and local taxes in certain states.
3) In states that are both wealthy and have a high cost of living, a person may be relatively poor despite having an income that would be middle class elsewhere. This person would normally not benefit so much from federal transfers, but might benefit from state and local transfers.
4) In general, wealthy and high cost of living states on net contribute money to the federal government and other states.
5) Thus, this AMT fix, by preserving the deduction, encourages these states to keep more of their money at home by enabling them to clawback some proportion of the taxes that they’re raising locally from their federal tally.
I think that these factors partially explain why the wealthiest and highest cost of living states and locales tend to have the highest taxes. It also implies that, so long as this AMT fix is done on a revenue neutral basis by raising taxes in some other method (particular if the taxes are raised from the same class of wealthy people not paying the AMT now), the effect of encouraging state and local taxes may be among its most important features. It also implies that AMT reform might be popular among many residents of wealthy states besides just those who are wealthy, particularly those who are too wealthy in national terms to get much back from the federal government, but who are poor in local and real terms do to the cost of living.
I also note that the cutoff for the top 5% of household incomes is $166,000 per year. That’s squarely in the range that I’ve seen talked about for getting AMT relief. So it does look to me like this’ll be a tax cut for the top 20%, minus the top 1% or so.
“If left unchecked” is accurate but somewhat misleading, considering that there have been one-time adjustments the last few years to index it. One reason why they weren’t made permanent is that the Democrats were arguing for a larger change to permanently exempt those outside about the top 1% (and hence for a larger tax cut on those in the top 15% but outside the top 1% than the Republicans), while the Republicans wanted to make the other tax cuts permanent at the same time as a tradeoff. And no deal was made, so the extension kept getting signed.
Assuming arguendo that there’s no relevant inherent difference(s) between the Democratic and Republican parties, it just puts us in a “hope for the best, plan for the worst” situation in which people try to get good policies enacted (primarily by making Democratic politicians believe that their chances for electoral success depend upon enacting “progressive” policies) and also consider what they’ll do when we’re inevitably disappointed.
Conveniently, Congress exempts themselves.
This is why Congress is backwards-looking.
They don’t index to inflation. They didn’t do it w/401Ks, campaign donations or this.
Of course, I remember reading years and years ago Congress didn’t like how much money they lost in taxes by people putting their money into 401ks. Billions at that time.
Somecallmetim said:
“Uhh, because our base isn’t dominated by Southern conservatives? Criticisms of the “everyone’s the same” species always strike me as, at a minimum, weak. Are we to assume that Abu Gharib was inevitable, and worse remains inevitable, because other governments have done much, much worse to the prisoners they’ve held, and “everyone’s the same”? Is it the claim that culture matters not at all?”
I do not care for this post very much. It reaks of politics. I appreciate the faith that you have in the democratic party to deliver better outcomes for society, however politicians, no matter their party affiliation, all face the same constraints and therefore will always create policies aimed at helping the groups that will help them attain and retain power. If you think this game of constant cost shifting is of net benifit to society then thats your foolish ignorance shining forth, not mine.
Surely the goal of AMT reform is making the tax code more consistent and predictable, rather than more progressive. I guess I don’t see why this is a bad goal.
Now, I share Tyler’s view that the Democrats, after six or eight years of united government, will probably smell about as bad as the Republicans. But this doesn’t look like an example of that to me.
In my opinion, a key element in the making of the fiasco that has been the present administration was that in the 2000 election, Republican voters were more interested in winning the election than in what their candidate might do after winning the election. GWB’s platform in the 2000 primaries was, I can win a general election. Planks in this platform included, Christians like me, Hispanics like me (at least more than anyone else you might nominate), Floridians like my brother, etc….
Clearly, nominating candidates based principally on electability is not a recipe for accountable governance.
While the days of this particular administration are numbered, I do worry that the partisans of each party are even more interested in winning for its own sake than they were in 2000.
If you read the article, the democrats are going to make the change revenue neutral which means some mixture of more taxes for the top 3% and/or more explicit taxes on the top 20%.
Really? Putting aside whether it actually ends up being revenue-neutral, who siad the counter-balancing increases will fall where you just said they will? Me, I’m betting not. Matter of fact, I expect to handily escape the AMT while despising the supposed progressive politics of the folks helping me to do so. A win-win, if you will! :^)
It’s not a subsidy. It’s exactly the opposite: it partially alleviates a long-existing subsidy to, as a few have already pointed out, Republican stronghold states.
It’s not exactly the opposite. It’s really inaccurate to describe it as a subsidy either way. (Though the part about deducting mortgage interest can be taken as a subsidy to home prices; at the same time, many people with a mortgage paid inflated prices due to that very deduction in the first place.) It’s more complicated than that.
First, you either believe in redistribution or you don’t. If you don’t, it’s hard to argue that you’re a progressive, under the current meaning. If you do, then it’s a bit unusual to describe redistribution based purely on income as a subsidy.
Second, you either believe in a treating all citizens in the country the same or in caring for people in your own state first. Again, the latter is rarely connected with being progressive. (And may be correlated with opinions on a strong federal government versus states’ rights.)
A great amount of the federal transfers happen simply because people in poorer states are poorer, on average.
The complicating factor, of course, is that notionally middle-class people by federal standards may be poor by their wealthy high cost-of-living state’s standards, and vice versa. That is one argument for the deduction. At the same time, we can consider the effects of one’s money going farther when on vacation (and in eventual retirement, if one moves to a lower cost-of-living area), along with the additional cultural opportunities that often come with high cost-of-living areas. Though, I suspect that these advantages are concentrated among the wealthier in the wealthy areas.
If you read the article, the democrats are going to make the change revenue neutral which means some mixture of more taxes for the top 3% and/or more explicit taxes on the top 20%.
Which of course means that childless renters in the top 20% may get screwed, since they have little to no chance of getting hit by the AMT currently, without fat mortgage deductions (and no child deductions).
Of course this rather non-egalitarian policy, very costly in terms of revenue, is the Democratic attempt to reward their wealthy urban and suburban supporters.
I think it’s that, and more. The AMT has been gradually eliminating the deductibility of state and local taxes. This means that state and local taxes in ‘blue states’ pinch harder than they used to–which will tend to make voters in those states less supportive of state and local government taxes and programs. This is not a positive dynamic for Democrats that they would like to see continue.
I don’t see much commentary on the complexity cost of having two parallel tax systems. Granted no one seems to be interested in getting rid of the AMT entirely, but reducing the numbers of people effected should generate some savings. Would anyone design the AMT today if it did not exist?
Tom
Jody,
In fact a few years ago The Economist editorialized that the AMT should simply be applied to the entire income distribution, with a lowering of the rate to make it revenue neutral. This would be a quick way to get tax simplification, which many think would be a good thing.
Of course besides paying off voters in high tax states, junking the AMT while raising the rate on the top 1% of the distribution pays off a lot of upper middle class professionals, like lawyers, who are often Dem supporters, while hitting the really rich, who are more likely to be Republicans, and who have gotten a lot of tax breaks in the last few years. Pretty hard to say which is more or less “progressive,” although Dems might sweeten the pot with a higher EITC, Uncle Miltie’s old baby.
Are the states which are net importers of cash from the federal government that way because they’re getting handouts– or because they’re net exporters of goods and services to the federal government? I’ve never seen a study actually addressing this question, though I’ve seen several which simply assume the former.
Do you count childrearing as a service to the federal government?
How can you say that eliminating the AMT is not a subsidy to blue states?
The AMT eliminates state and local tax deductions. That is a direct subsidy to state and local governments in blue states.
The AMT eliminates exemptions and the child tax credit. That is a direct subsidy to parents. Not exactly a subsidy to you barren blue staters.
The AMT eliminates the home mortgage interest deduction. This is a huge, huge subsidy to the housing industry, and directly supports the insane home prices in blue states.
Buzzcut,
Eliminating the home mortgage interest deduction is “a huge, huge subsidy to the housing industry”????
Are you kidding? Who do you think supports it besides all those homeowners in all states?
Jody,
I was not clear. I was not writing about the AMT instead of the regular income tax; I was writing about the combination. Eliminating / sharply reducing one of the two systems would by itself promote simplicity.
Tom
Guess we can expect some pretty steep cuts in that $300b deforestation budget pretty soon, then.
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