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January 08, 2007
Baucus And Grassley Try To Screw Up The Country
Sebastian Mallaby's got a terrific column today blasting the the senseless, fiscally irresponsible team of Max Baucus and Chuck Grassley, who've decided to declare war on the Alternative Minimum Tax while eschewing any talk of replacing its $750 billion in revenues with anything new. Baucus appears to think increased tax enforcement will make up the shortfall, which is akin to replacing your job income with change gathered behind the couch. Grassley, meanwhile, is taking a brave stand against the economics of taxation: "It's unfair," he blustered, "to raise taxes to repeal something with serious unintended consequences like the AMT!" I sort of hate to do this, Chuck, but remember those tax cuts? The ones you voted for? Here's what they did:
The AMT, which was created to ensure the rich couldn't deduct and shelter their way out of taxation, was created in 1969. It kicks in when folks making above a certain income pay below a certain tax rate. Not indexed for inflation, the share of the electorate paying the AMT grew over the past few decades. Bush's tax cuts, however, sparked a massive drop in rates, bringing millions under the limits and exploding the AMT's reach. Without them, 16 percent of Americans would have paid the AMT in 2010. With them, that number more than doubles, to 33 percent. This reckoning was put off the by tax cutters in the form of a temporary exemption from the AMT, an irresponsible little shell game meant to superficially improve the budget projections they used to sell the cuts, thus making them look more fiscally responsible. That the very same tax cutters -- like Grassley -- are now seeking the AMT's repeal without any replacement shows the depth and cynicism of their deception the first time through. And here's the consequence: In 2006, 3.5 million taxpayers paid the AMT. In 2007, that'll shoot up to 23.4 million.
The hope of most policy wonks is that the AMT will provide the impetus for a wholesale restructuring of the tax code -- possibly in the direction of something like Ron Wyden's Fair, Flat, Tax Plan. Some even suggest that the AMT could be modified into the only tax rate and the words "Alternative Minimum" simply struck from the phrase. There's some precedent for reform at this point in Bush's presidency: Ronald Reagan, weakened and looking for accomplishments by the last two years of his term, largely accepted a plan championed by Dick Gephardt and Bill Bradley which largely became the Tax Reform Act of 1986. But what Baucus and Grassley are pushing isn't reform: It's fiscal demagoguery, and they should be roundly criticized for the offense. Is it really so much to ask that the Chair and ranking member of the Senate Finance Committee betray a working knowledge of finance?
January 8, 2007 in Taxes | Permalink
Comments
The strange thing is, Grassley is usually a stand-up guy.
Posted by: Nicholas Beaudrot | Jan 8, 2007 9:35:32 AM
Seriously Nicholas, Grassley hasn't been a stand-up guy since Jan 2001 when Bush took office. Like many "moderate" or "sensible" Republicans, his true character, or lack of same, started showing when he gained the majority and had a Republican president. He has aided and abetted every economic proposal from Bush. Baucus is just a dinosaur. Tester showed that you don't have to be a complete conservative to be elected in Montana. In any event, this is probably just the opening bid in a long negotiation over taxes.
Posted by: MarvyT | Jan 8, 2007 9:50:11 AM
Also, Speaker Pelosi has re-instituted "paygo" , so this would be a non-starter in the House.
Posted by: MarvyT | Jan 8, 2007 9:56:26 AM
With the availability of modern tax software like Turbo Tax, I don't think it's very onerous to calculate taxes two different ways, because the software does it for you and makes sure your return reflects whichever approach is appropriate for your situation. It doesn't matter if you prepare your tax return yourself or hire an accountant to do it for you.
As for the AMT, I think it could be easily fixed by including capital gains and qualified dividends in the income base used to calculate the tax while raising the exemption and indexing it to inflation in the future. The 1986 Tax Reform Act taxed all income alike with a top federal marginal rate of 28%. I think Wyden's 35% top rate is too high, because when you add the top marginal income tax rate used by a number of large states, investors in those states will pay a total marginal rate in the mid-40's. I think there would be negative effects on investment and risk taking if the burden were that high. It would be better if the AMT (with capital gains and dividend income included in the base) could also serve as an Alternative Maximum Tax for very high income taxpayers.
Posted by: BC | Jan 8, 2007 9:57:20 AM
It would be better if the AMT (with capital gains and dividend income included in the base) could also serve as an Alternative Maximum Tax for very high income taxpayers.
I'm going to be honest. I read something like that and I want to A)scream and B)fire off a profanity-laced comment that calls into question your lineage and sexual practices.
However, I'm not too well-versed in economics or the inner workings of the US tax system, and such a comment is unlikely to cause you to explain your statement some more. So I'm hoping that this comment expresses my distaste at some "maximum tax" for rich people that's put into place to protect investment (not a problem under Ike when the top marginal rate was 90%, BTW), while also getting across my genuine desire to understand what you're actually trying to say.
Thanks.
Posted by: Stephen | Jan 8, 2007 10:19:54 AM
"In any event, this is probably just the opening bid in a long negotiation over taxes."
Word.
"Starve-the-Beast" has a few fans on the decent side of the aisle, who really really don't want to make their contributors pay back their ill-gotten gains from the great generational FICA Rip-off Scheme.
Posted by: bob mcmanus | Jan 8, 2007 10:54:48 AM
Stephen,
OK, I'll give an explanation a try.
In the 1950's, the top ordinary income marginal tax rate was 90%. However, the top long term capital gains tax rate was 25%. Then, as now, very high income people derived the bulk of their income from capital gains (as opposed to salaries and bonus). Furthermore, extremely lucrative tax shelters were available before the so-called "at risk" rules passed in the 1970's reduced their attractiveness. Under the rules in the 1950's, a wealthy person could invest, say $1 million in an oil exploration or real estate venture, and, with the use of leverage (borrowing) receive writeoffs for anywhere from 3 to 6 or more times the amount invested. These "losses" could then shelter income that might otherwise be taxed at 90%. So, a $1 million investment creates a $5 million loss and saves $4.5 million in taxes. If the venture does not work out, the investor is not obligated to repay the loans, and his loss is limited to the $1 million he invested. Thus, most sophisticated, high income people never paid anywhere close to a 90% tax rate, and some managed to pay nothing at all which led to the creation of the Alternative Minimum Tax.
As much as you might like to, rich people will not stand idly by and allow themselves to soaked ad infinitum. They will alter their behavior and find ways to mitigate high taxes. On the other hand, a tax rate perceived as reasonable is much more likely to actually be paid.
Posted by: BC | Jan 8, 2007 11:04:48 AM
© 2007 Mark Robert Gates
As far as taxation of wealthy goes, not being so, I cannot say much about what I would like to be taxed, however, I have always been in favor of a maximum income derived total tax (MIDTT) for middle class and below taxpayers. I have found the lower on the ladder one goes, the higher the total percentage of income and other government taxes based on income, is that is deducted and unreturnable, as unless one has numerous income tax deductables, or falls into the poverty level, where almost all deducted money is given back, then one is screwed. There is a place in taxation, between where one earns enough to make fair deductions, and one does not, that is essentially; fairwell income.
Somewhere, around 10-15%, seems a good place to start, as far as MIDTT, as there levels would seem fair, since when I first started working that cooks job at, Big Boy, back in the 70's and early 80's, I remember checks with a total of 20-25% income deducted taxes.
-Mark Robert Gates
please my blogs:
http://lokieponaphoenix.blogspot.com/
http://wellnessempowered.blogspot.com/
Posted by: Mark Robert Gates | Jan 8, 2007 11:19:43 AM
Here's a thought, not terribly a propos of anything in this post:
How much would tax income be increased if we simply audited everyone with income or wealth over a certain level? Would the increased IRS workforce pay for itself by catching mistakes, errors, and/or fraud?
The basic idea is fairly simple. If you make, say, $1 million in income, or you have $10 million in assets, you get audited every year, unless you don't itemize and simply take the standard deductions. Save your receipts, don't cheat on your taxes, and it won't be much of a problem, but be prepared to justify every single writeoff to an agent scrutinizing your file.
Er, © 2007 Nick Simmonds, or something. Apparently.
Posted by: Nick | Jan 8, 2007 11:40:25 AM
As much as you might like to, rich people will not stand idly by and allow themselves to soaked ad infinitum. They will alter their behavior and find ways to mitigate high taxes. On the other hand, a tax rate perceived as reasonable is much more likely to actually be paid.
The problem here is how one defines "reasonable." For a much larger number of people than one would think, "reasonable" usually equals "zero."
Posted by: chdb | Jan 8, 2007 11:40:26 AM
BC, what was paid in the 1950s was corporate taxation. Right now corporate profits are 11% of the USA's GDP and corporate tax is 35%, but corporate taxes only account for 1.5% of GDP. In the 1950s, corporate taxes accounted for about 5% of GDP, give or take.
And it is in fact possible to collect high amounts of taxation from the rich, given the right tax policy. Sweden and Norway have no trouble collecting more than 50% of GDP in taxes.
Posted by: Alon Levy | Jan 8, 2007 11:48:58 AM
BC,
Thanks for the explanation.
As much as you might like to, rich people will not stand idly by and allow themselves to soaked ad infinitum. They will alter their behavior and find ways to mitigate high taxes. On the other hand, a tax rate perceived as reasonable is much more likely to actually be paid.
This reads into my intentions. You also fall into the trap of thinking that people will view a particular tax rate as "reasonable." Unless you are thinking of the number "0" there is no "reasonable" tax rate. If there are loopholes, people who can afford to use them will use them until their tax rate is, again, zero percent.
In terms of who is being "soaked," it is most certainly those who are not wealthy. FICA takes 15% of everyone's income up to $87,000. Why the cap? Why should my income be taxed at 15% with no loopholes, no deductibles, no credits, no shelters, and CEO's not only get to use all these fun things on their income taxes but also end up paying 15% of only 1% or 10% of their total income.
I thought that there was some good reason behind your call for an Alternative Maximum Tax. Too bad there isn't.
Posted by: Stephen | Jan 8, 2007 12:17:04 PM
Stephen,
Regarding a reasonable rate of income tax, I remember attending a conference in Washington D.C. while the tax reform was being debated prior to passage of the 1986 Tax Reform Act. At the time, Bob Packwood (R., OR) was Chairman of the Senate Finance Committee. In his presentation, he commented about canvassing a variety of interest groups asking them how low would the top marginal tax rate have to be for them to go along with eliminating all deductions and exemptions? Their answer: 25%. The Congress managed to get the rate down to 28% (from 50%), though it only lasted two years or so before drifting back up again.
Alon,
There is a lot of controversy among economists as to exactly who bears the burden of the corporate income tax. I happen to believe that most companies, especially large ones, treat it as a cost of doing business that gets built into the price of the goods and services we all buy. The 1986 Tax Reform Act reduced the corporate income tax rate from 52% to 35%. Corporate returns on equity benefitted in the first year or so after enactment, but the benefits of the lower tax rate were soon competed away, and overall corporate returns on equity and on total capital remained within historical norms adjusted for where we were in the economic cycle.
As for the tax burdens of 50% or more in Norway and Sweden that you alluded to, I think they reflect a different societal consensus than Americans are likely to accept anytime soon. If you look at the European economic model (larger public sector) than the U.S., I think there is a perceived tradeoff of more economic security and less income and wealth inequality in Europe vs greater economic growth and more individual economic opportunity here. If we could somehow replicate the European economic model (including much higher taxes) tomorrow, the long term cost would likely be slower growth and less economic opportunity. Most economists generally agree that high taxes inhibit economic growth, but they disagree about just how high the burden needs to be before the adverse economic effects start to bite.
Posted by: BC | Jan 8, 2007 12:51:42 PM
They will alter their behavior and find ways to mitigate high taxes. On the other hand, a tax rate perceived as reasonable is much more likely to actually be paid.
Yes, they will alter their behavior, and then Congress should alter the tax code to block their approach.
There is zero evidence that the tax advisors to the wealthy will be reasonable at any tax rate: their job is to find the loopholes and reduce the taxes paid. Congress should just fill the loopholes that are discovered as they are found and used. This is like maintaining the highways: fill the potholes as found, and occasionally repave the highway. Dem majorities are probably not great enough now (in the Senate, particularly) to resurface the roadway, but we sure can fill lots of potholes.
The wail that high income folks will stop investing and bring down the econommy is just scare tactics (fight them over there so we don't have to fight them here). If there are good alternatives to US investments, the wealthy will take those choices, taxes or no taxes. So be it. If the corporations move offshore (physically, not just financially), make it very expensive in taxes and regulations to do business here. Hardball!
I doubt the US could achieve the tax levels on the wealthy that the scandanavians do, but surely we can do more to make the tax code more progressive. We lived with a higher tax on the rich for many years (and did pretty well as an economy, too).
I'd be looking at the Corporate taxation rates real closely. As it is, the corporations pay low taxes, buy-off the Congress and the Executive Branch with executive contributions and lobbying, and then deduct those contributions (often disguised as trade association expenses) as business expenses - a total absurdity. More hardball!
Grassley and Baucus need to be reigned in - especially Baucus by the Sen. Dem. caucus and Harry Reid. If he doesn't get with the Dem. program, he should be assigned to a different committee and/or face primary election opposition by a Dem. who will be a Dem. Hardball, again!
Posted by: JimPortlandOR | Jan 8, 2007 12:53:44 PM
Baucus appears to think increased tax enforcement will make up the shortfall
Mallaby seems to have that impression, but he doesn't actually know. He quotes Baucus saying he wants the reform to be "fiscally responsible," but apparently the Senator didn't say anything about how to accomplish that, so Mallaby doesn't cut him any slack for it. As he probably should, at least provisionally, since there's no reason to think Baucus doesn't know better collections don't add up to "fiscally responsible" in this case, and he isn't the one who made the connection.
Mary, Grassley supports Bush on what he agrees with. He's independent on other points, such as the war. He believes in low taxes.
Posted by: Sanpete | Jan 8, 2007 4:06:08 PM
Baucus and Grassley are totally irresponsible. In 2001, when Congress was passing the Bush tax cuts, the WaPo wrote this:
"Paradoxically, the tax cut will sharply increase the number of taxpayers subject to AMT because it will reduce their income tax liability below the point at which the surcharge kicks in.
Without the tax measure approved yesterday, the number affected would rise to 17.5 million in 2010, according to the Joint Committee on Taxation. But with the tax bill, the number reaches 35.5 million by that date.
White House and congressional negotiators counted the AMT revenue from those taxpayers as a "give back" enabling them to keep the cost of the bill to the $1.35 trillion allowed by the Senate."
(an excerpt from my post at the OMB Watch Budget Blog - http://www.ombwatch.org/article/blogs/entry/2648/3)
Posted by: Craig Jennings | Jan 8, 2007 6:14:20 PM
The point that seems to be missing in this discussion is that fact that wealthy people already pay the vast majority of the taxes. When you give a tax break, it only makes sense that the people that actually pay taxes would receive the most benefit from any tax break that is offered. Since the top 50% in income already pay 96.5% of the taxes, this only makes sense. You just don't hear this little fact in your hysteria over how people that actually pay taxes get a tax cut.
http://www.infoplease.com/ipa/A0923085.html
The other question that it would be interesting to hear a point of view on is exactly what is a fair level of taxation? I've seen it noted that the rich paying zero in taxes is to low (it is kind of ironic that this is a consideration, when it is so far from reality).
Posted by: m | Jan 8, 2007 7:33:46 PM
I for one would like to toss the AMT, along with the rest of the pernicious income taxes that we the people have no control over and shift the entire tax base to consumption. There is a non-regressive, revenue-neutral tax replacement plan to do just that; the FairTax.
www.fairtax.org
This plan has a provision to make spending up to each household poverty line tax-free.
Legislation introduced to Congress (HR 25) disarms the tax code and replaces it at the same time with the consumption tax. Companion legislation (HJR 14 and 16) starts the process of amending the Constitution to repeal the 16th amendment.
Let's trade our barrel of bad apples for one good apple.
Posted by: Chad Sargent | Jan 8, 2007 8:07:24 PM
The strange thing is, Grassley is usually a stand-up guy.
Hm. Check out Brad DeLong's brilliant takedown of Grassley's incredibly intellectually dishonest letter to the NYTimes in 2002.
(Grassley and Baucus need to be reigned in
Reined in (like horses). See also "free rein".)
Posted by: Allen Knutson | Jan 8, 2007 11:26:09 PM
Why is it a big deal how many people are affected by the AMT? Apparently the scary numbers would include anyone who ends up paying $1 more in taxes because of the AMT. "Affected by the AMT" doesn't mean "paying much higher income taxes". The important question is how much people are paying, not whether the number is calculated by the AMT or the standard rules.
Posted by: KCinDC | Jan 9, 2007 11:47:21 AM
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Posted by: Offers in compromise,Garnishment,Wage Garnishment,Tax Levy | Oct 5, 2007 7:44:51 AM
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