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Democrats' tax dilemma

One of the Democratic Congress' consistent themes has been their desire to "roll back" tax cuts "for the wealthy." The simplest way for them to accomplish this goal is to allow the last round of tax cuts implemented to just expire in 2010, or to only extend them for "middle class" taxpayers, effecting a tax increase on higher earning households. The problem remains, "where to draw the line?" Another related problem is the "paygo" rules they set when they recaptured the Congress, whereby any tax cuts or spending increases must be offset by corresponding tax increases or spending cuts somewhere else.

All of this comes to a head with the Alternative Minimum Tax, enacted decades ago to ensure that a few taxpayers with high incomes couldn't "hide" all their income with deductions and avoid paying federal income taxes altogether. What once affected a very small number of taxpayers has inevitably become a wider net, because the AMT was not indexed to inflation. "Bracket creep" over the years means more and more taxpayers become subject to the AMT - soon to number roughly 20% of all taxpayers. Reconciling the "rollback," "paygo," and the AMT has proven a daunting task, as Michael Barone explains at NRO:


House Democrats are simmering, but they will probably have to go along. There's a process argument for waiving paygo, which is that future AMT revenues are fictitious because no Congress will allow the tax to go into effect. But it's nonetheless embarrassing for Democrats to renounce a rule they adopted as a guarantee of their fiscal responsibility.

The reason Democrats risked this embarrassment is that the AMT tends to fall on voters in places with high state and local government spending and taxes -- Democratic places like Massachusetts, Connecticut, New York, New Jersey, Maryland, and California.

Taxpayers hit by the AMT can't deduct state and local taxes from their federal income tax bill. Sooner or later, that puts downward political pressure on state and local spending. And that, in turn, threatens the vested interest of a key Democratic constituency, the public employee unions. Democratic voters in suburban New Jersey, for example, who feel far from rich, face a substantial tax increase if they're suddenly covered by the AMT. They may take their revenge on Democratic candidates and on New Jersey public employee union members.

The Democrats' need to get rid of the AMT suggests the possibility of broader tax reform. House Ways and Means Chairman Charles Rangel has put forth such a proposal, with a cut in the corporate tax rate and huge tax increases on very high earners. But it's a nonstarter as long as George W. Bush is in office.


Read the rest at the above link. Democrats must tread a very narrow path to avoid sticking their own power centers with what amounts to a large and unexpected tax increase.


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