Moron taxes

Starving the beast

October 30, 2005

 

 

 

MYTH: A repeal of the Alternative Minimum Tax should be offset by a reduction in tax programs benefiting the average American, not by the repeal of the Bush tax cuts.

So the Mack-Breaux panelists appear to be leaning toward AMT repeal, a move that would simplify the code and offer tax relief. But it wouldn't be revenue-neutral: commissioners believe repeal would cost $1.2 trillion in ten years. In order to compensate, they are reportedly considering limiting the mortgage-interest deduction to $300,000 or $350,000 of a mortgage instead of the $1 million limit under current law. Since even getting rid of the mortgage-interest deduction entirely wouldn't raise $1.2 trillion, tax-free employer-subsidized health care and deductions for state and local taxes may also be on the table.

Such a plan would not rally conservatives. Lawrence Hunter, chief economist for the Free Enterprise Fund, complained to the Washington Times that the "tax-reform panel is recommending a huge tax cut for rich people in blue states and a huge tax increase for middle-class folks in the red states." Other bolder plans have gained a wider popular following than anything the president's commission is likely to propose -- or that Congress is likely to enact…..

Instead of emphasizing supply-side tax cuts that may eventually increase receipts, conservatives are now more likely to call for "starving the beast." Under this theory, tax cuts can force Congress to shrink government by reducing the available revenue.

--W. James Antle III, “The Tax Reform Trap,” The American Spectator, 10/25/05

REALITY

Let’s take a step back and ponder what Bush’s appointed Tax Commission is actually looking to do when it comes to fixing the mess that is the US tax code. First of all, the current Alternative Minimum Tax (AMT) mess in the country is a mess. We are not going to dispute this. Many people who should not be affected by it are being affected. The AMT was originally instituted in the 1960’s to make sure the ultra, ultra rich paid their fair share of taxes. Unfortunately, when originally passed by Congress, the measure was not properly adjusted for inflation. So an income that constituted a lot of money in the 1960’s is no longer a lot of money today, resulting in a dual-income family of a teacher and a firefighter who make a combined $92,000 a year having to face this greater level of taxation. This is not how the AMT was supposed to work. In fact, some sources say that the Bush tax cuts may have forced people into AMT trouble, because after the tax cut they were paying less tax than they should for their income level. Make sense? Following all of this? I thought so….

The AMT needs fixing, but what should be done to fix it? The problem is not easy to fix. In fact, it is quite expensive. Some analysts suggest it will soon be cheaper to get rid of the entire tax code than to get rid of the AMT. You can see above that the commissioners project it could cost $1.2 trillion over the next ten years to fix the AMT. Given this fact, there are many things that can be done to raise this money. However, I can tell you what should NOT be done to rectify the problems with the AMT. Read the first quote above again to see some of the possible revenue-reducing schemes put forth by the Commission. Decreasing the amount of mortgage-interest that can be deducted from income taxes to $300,000 of a mortgage? That’s a fine proposal if you live in the middle of North Dakota, where the average home price is less than $150,000. However, what if you are one of the many people who live in Seattle, New York, Washington, DC, or San Francisco? With the average apartment in Manhattan currently going for $1 million, the $300,000 deduction doesn’t get you very far. Now, are the people who live in New York better able to pay a higher tax bill than those who live in North Dakota? Maybe, but everything, including income and the cost of housing, is relative to your location.

And let’s not forget the other parts of their proposals—health care and deductions for state income tax! Aren’t health care costs high enough already without further damaging their fragile place within American businesses? When employers are no longer able to provide tax-free health care benefits, who do you think will suffer most? My guess is the poor employees who can barely afford their premiums and co-pays right now. And not allowing people to deduct state income tax? Does that not then produce a double-taxation scheme? Wasn’t the dividend tax cut passed last year to avoid such a scenario? Granted this tax cut only pertained to dividends, but its primary aim was to eliminate the double-taxation. Would it be fair to allow shareholders to avoid double-taxation, and not the average American tax payer?

I think the elephant in the room here is obvious. What is the one issue on W’s agenda that would strip the government coiffeurs of roughly $1.9 trillion in revenue over a period of 10 years? What was that legislation again? Oh, that’s right—a permanent extension of the Bush tax cuts. What if W, once he’s done dealing with failed judicial appointments and the indictments of his top people, forgot about the tax cuts for the rich and instead fixed the AMT mess. Wouldn’t that be a more equitable solution than taking away healthcare benefits from average Americans? As for "starving the beast", is any right minded person listening? We don't mind cutting defense spending and corporate welfare, however we do want to see an American future that includes health care and reduction, among other things!