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December 12, 2007

Confused Americans for Truth - Congress Unable to Afford Cost of Preventing Tax Increase

In the words of Rep. Ellen Tauscher (D-Calif.):

I would remind [the Republicans] we took the majority and decided we were not going to run the government as they did, as profligate spenders.

I think she's wrong, but I have to set the stage a little first. The above is what is known as an intellectual, nuanced argument. I am going to make an emotional, bumper-sticker argument. I know that's what I'm doing, because experts in the publishing industry have explained that this nuance vs. bumper-sticker thing is characteristic of debates betreen liberals and conservatives. Unfortunately, my emotional, bumper-sticker argument is going to require several paragraphs of explanation involving the details of the tax code, the history of the Federal budget process, and obscure economic principles.

So, keep this subtext in mind as you dive into the next few paragraphs.

Back in 1969, Congress enacted a thing called the Alternative Minimum Tax. The original intent was to create a simplified tax that could not be reduced using so-called loopholes exploited by the wealthy people. For example, in 1965, you can see that the majority of the tax revenue was coming from the middle range of the income brackets. This was not what the progressive tax code was supposed to do, hence the AMT.

Since then, the AMT has become a completely different animal. The initial AMT rate of 10% has ballooned to 28%, the formula has become more complex, and it's spreading to the middle class.

For the past several years, Congress has included in the budget a patch to the AMT formula that increases the exemption at lower income levels. The last patch expired at the end of 2005. Republicans want to extend the patch through the end of 2006, but Democrats claim the country can't afford it. Hence, the above statement by Rep. Tauscher.

The tool used to create this state of affairs is the five-year budget plan. The five-year plan starts by projecting spending and taxes for five years. Then, a completely different plan is drawn up, and the results are compared. The five-year plan can promise a huge deficit reduction even if spending in the current year is going to increase. Part of that reduction comes from expiring tax cuts. For example, we implement a tax cut of $50 billion that lasts four years. Because of the expiration of the cut In the fifth year, we automatically save $50 billion, which counts as part of the overall deficit reduction. It's a cowardly way to do business, but the side effect is even worse: if you were to pay the same tax in the fifth year that you paid in the fourth year, Democrats could call it a $50 billion spending increase.

I'm not making this up.

So, I'm sorry that I had to hit you with all that data, but now you know the truth behind the Republican-sponsored AMT tax cut and you understand the difference between a carefully-researched analysis (Republicans are spending too much) and a dashed-off bumper-sticker opinion (read the above four paragraphs). That's a pretty big payout for a small investment of your time.

Don't thank me. It's enough that I know how you must feel.

Respectfully submitted,

Ferdinand T. Cat

# At Wed 7:48 PM | Permalink | Trackback URI | Comments (1) | More Confused Americans for Truth | Tags: Alternative Minimum Tax AMT AMT patch Congress conservative Democrats economics Ellen Tauscher liberals tax cuts taxes

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Posted by: Aurora at December 13, 2007 4:52 AM