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The Democratic party wants to help me
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.
Posted by Tyler Cowen on April 9, 2007 at 10:06 AM in Political Science | Permalink
Comments
"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".
Posted by: richard at Apr 9, 2007 10:18:15 AM
I do not understand why the progressives expect anything different from the Democrats.
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?
Posted by: SomeCallMeTim at Apr 9, 2007 10:20:22 AM
"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.
Posted by: save_the_rustbelt at Apr 9, 2007 10:23:51 AM
It was ugly what years and years of power did to the Republican Party.
What did you expect? The common mantra of the Republican party is that Government is corrupt and inefficient. Why would you expect Republicans to be anything other than corrupt and inefficient in Government when that is exactly what they profess?
Posted by: squik at Apr 9, 2007 10:40:35 AM
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.
Posted by: br at Apr 9, 2007 10:40:50 AM
...as long as we are piling on (and ya gotta admit, this post deserves it), why should we assume "progressives" (whoever they may be) are naive? What has changed is that Democrats could not deliver any national policies for many years. Now, they have a chance of delivering. The GOP, on the other hand, looks vastly diminished in its ability to deliver. Does our host think that progressives (whoever tehy may be) should depart from the political field now that we know one party is corrupt? Or should they address the party that may be able to deliver policy change? Assume corruption? Did our host do this as well when the GOP came to power? Or is this just a reflection of the assumption that, however bad Republicans may be, Democrats must be worse?
Posted by: kharris at Apr 9, 2007 10:51:08 AM
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.
Posted by: John Thacker at Apr 9, 2007 11:18:59 AM
AMT reform is a perfectly progressive platform item. It's an attempt to make the tax code more, um, progressive.
Heh, hardly. "Can hit people with incomes as low as $50,000," eh? The median household income is below $50,000 in the United States. See the Census. So right off we're talking about a tax cut that will only affect the top 50% of households. Already that seems somewhat difficult to be a progressive tax cut.
In addition, while there are some households down in the $50,000 range that could be hit by the AMT, the vast majority of those affected make $100,000 to $500,000. (People making over $500,000 tend to owe enough regular tax, since the mortgage interest deduction is capped and people have a limit on how many kids they can have, so deductions don't take up enough of their income except in outlier cases of people really try to avoid taxes by, say, investing everything in municipal bonds.) $91,000 was the cutoff for the highest quntile of household incomes in 2005.
In exactly what sense is a tax cut that mainly affects the upper 20% (but not the top 1 or .5%) progressive?
The second quintile (20th to 40th percentile) had the highest percentage tax cut under the Bush tax cuts. They'll get nothing here. And in fairness, many of the newly AMT hit among the upper middle class got little from the Bush tax cuts because they only exposed them to more AMT while cutting their regular income tax.
Posted by: John Thacker at Apr 9, 2007 11:29:55 AM
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.
Posted by: John Thacker at Apr 9, 2007 11:37:16 AM
Between enjoying your AMT shield and your opposition to vouchers, you're making a pretty good Democrat, Tyler
Posted by: geez at Apr 9, 2007 11:47:38 AM
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.
Posted by: washerdreyer at Apr 9, 2007 11:52:54 AM
I'd really like to know what Tyler (and Alex etc) think of SomeCallMeTim's point about Southern conservatives.
Posted by: michael vassar at Apr 9, 2007 12:04:37 PM
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.
Posted by: Sandy P at Apr 9, 2007 12:22:11 PM
It's also interesting that some of those high-tax states are losing reps in the next census....
Posted by: Sandy P at Apr 9, 2007 12:23:17 PM
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.
Posted by: John Pertz at Apr 9, 2007 1:10:04 PM
>I do not care for this post very much. It reaks of politics.
Politics isn't a dirty word.
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%.
Posted by: joeo at Apr 9, 2007 1:39:26 PM
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.
Posted by: albatross at Apr 9, 2007 2:07:10 PM
What did you expect? The common mantra of the Republican party is that Government is corrupt and inefficient. Why would you expect Republicans to be anything other than corrupt and inefficient in Government when that is exactly what they profess?
Reagan may have used that kind of rhetoric, but W has rather explicitly refuted it. If I recall correctly he said in his 2000 campaign something along the lines of "For too long my party has seen the government as an obstacle to be overcome rather than something that can be used to help people".
Posted by: TGGP at Apr 9, 2007 4:41:42 PM
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.
Posted by: Cyrus at Apr 9, 2007 4:56:41 PM
Tyler's right on this one. The Democrats are essentially protecting the ability of well-off taxpayers to deduct their state and local taxes. This is essentially a subsidy from poorer taxpayers in lower-tax areas to wealthier taxpayers in higher-tax areas. The Democrats choose distortionary expansion of government (based on making taxpayers in low tax localities subsidize taxpayers in high-tax localities) over equality, even when the inequality is completely non-meritocratic and not based on any efficiency concerns.
Posted by: Keith at Apr 9, 2007 5:40:42 PM
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! :^)
Posted by: Bernard Guerrero at Apr 9, 2007 6:33:50 PM
"This is essentially a subsidy from poorer taxpayers in lower-tax areas to wealthier taxpayers in higher-tax areas."
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.
And what's wrong with that premise? Many wealthy-ish Democrats are tired of paying for policies (and people) we have come to dislike for what should be obvious reasons to anyone with a soul and a conscience.
Posted by: fustercluck at Apr 9, 2007 7:05:50 PM
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).
Posted by: John Thacker at Apr 9, 2007 7:24:11 PM
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.
Though it may harm a large part of their base-- wealthy childless renters, Professor Cowen. Of course, one could argue that such people vote overwhelmingly for Democrats anyway, and they're merely going after a swing vote, I suppose.
Posted by: John Thacker at Apr 9, 2007 7:31:30 PM
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.
Posted by: Slocum at Apr 9, 2007 7:49:11 PM
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.
Posted by: Paul Zrimsek at Apr 9, 2007 9:35:34 PM
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
Posted by: Tom G. at Apr 9, 2007 10:22:02 PM
Would anyone design the AMT today if it did not exist?
They call it a flat tax.
Posted by: Jody at Apr 9, 2007 11:06:25 PM
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.
Posted by: Barkley Rosser at Apr 10, 2007 2:43:31 AM
"For too long my party has seen the government as an obstacle to be overcome rather than something that can be used to help people".
We've seen how well that has worked out. Ask Louisiana about the help they still haven't gotten.
Posted by: squik at Apr 10, 2007 8:56:19 AM
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?
Posted by: Cyrus at Apr 10, 2007 9:57:44 AM
I count childrearing as a service to the children, though the significance of the question is equally mysterious either way.
Posted by: Paul Zrimsek at Apr 10, 2007 10:09:03 AM
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.
Posted by: Buzzcut at Apr 10, 2007 10:33:21 AM
OOOH, subsidies - Charlie Rangel said what would happen if the AMT went away.....IIRC.
Besides, I thought dems like to pay higher taxes?????
So, what's the beef?
Posted by: Sandy P at Apr 10, 2007 11:20:06 AM
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?
Posted by: Barkley Rosser at Apr 10, 2007 2:39:26 PM
Why is this policy "non-egalitarian"?
Posted by: Brian at Apr 10, 2007 8:51:05 PM
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
Posted by: Tom G. at Apr 10, 2007 9:42:59 PM
"Besides, I thought dems like to pay higher taxes?????"
"Dems" don't like to pay higher taxes; we just prefer that they go toward things that benefit society as a whole - e.g. not to big oil subsidies (since many seem to enjoy that word around here), not to deforestation, not to cranking up the war machine, and especially not to the cramming of an ideological (Christian) agenda down the throats of the American public through both blatant and subversive means.
Posted by: fustercluck at Apr 10, 2007 10:58:31 PM
Guess we can expect some pretty steep cuts in that $300b deforestation budget pretty soon, then.
Posted by: Paul Zrimsek at Apr 10, 2007 11:10:46 PM
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