The Republicans Play Chicken

By Mimikatz

The current fight between the House and Senate over tax cuts is, once again, largely a fight between advocates for the super rich and the merely rich, or at least merely well off, with the super rich winning and the rest of us left holding the bag.  The House GOP, with 9 Democratic votes, passed a budget bill last week extending President Bush's 2003 tax cuts on income from dividends and capital gains to 15%, cuts that overwhelmingly go the very rich.  The Senate earlier had balked, instead using most of its tax expenditure budget on relieving millions of middle to lower upper income households of complying with the Alternative Minimum Tax in 2006.  Secretly, most Republicans would prefer both breaks.  But the cuts they were able to wring from food stamps, Medicaid, student loans and the like were so small that either of these proposed tax measures would increase the deficit (and with it the cumulative national debt, now over $8 trillion), and together they are a fiscal disaster in the making.  So the GOP is engaging in a colossal game of chicken in which 99.7% of the taxpayers are likely to be the big losers, especially those households making between $50,000 and $200,000.

The GOP strategy is apparently to drop the AMT fix from the Reconciliation Bill and move it next year as a  separate measure.  The AMT, designed decades ago to prevent the wealthy from avoiding taxes, was never indexed for inflation.  Thus, it captures more taxpayers every year, and in 2006 will apply to those with incomes of $50,000 to 75,000.    To oversimplify, the AMT prevents taxpayers from using certain deductions if the result is to reduce their tax bill too much.  The most widely used of these are the  “Schedule A” deductions for state and local income and property taxes, and some medical expenses, as well as mortgage interest where the loan is not used to buy or improve a home.  These deductions matter most to people for whom they are a substantial fraction of adjusted gross income, not to the very rich, who are already subject to the AMT.  Without a fix, the 15 million new taxpayers who would be subject to the AMT in 2006 would be primarily those who live in states with high property values and high state and local taxes—California, Florida, New York and the like, mostly blue states.  The AMT fix adopted by the Senate would cost the Treasury $31 billion for one year, which the Senate partially off set by increasing revenues by $19 billion. Because it includes the AMT fix, the Senate bill, though still skewed to upper bracket taxpayers, would give 90% of its benefits to those earning less than $500,000 (64% to those earning less than $200,000) while the House bill gives almost 50% of its benefits to those earning over $500,000, according to the Committee on Budget Policies and Priorities.  By dropping the AMT fix in conference, the Reconciliation bill will presumably conveniently also drop the tax increases.

The House bill,  instead of fixing the AMT, includes an extension of the dividend and capital gains tax cuts, which do not even expire until the 2009 tax year.  Those benefits go primarily to the very rich.  According to the CBPP, those earning over $1 million, who constitute only .3% of households, would receive 45% of the benefits, an average tax break of $32,000 per household in 2009. These cuts were recently found by the Federal Reserve, in a December 6 article in the (subscription only) Wall Street Journal, to have had little or no effect on the value of the stock market (one of its supposed benefits) or on the amount paid to shareholders as a proportion of earnings.  This occurred in part because companies that increased dividends also reduced share repurchases (which increase the value of shares outstanding).   Even if one believes that these cuts would have significant long-term benefits, these would be more than offset by the harm done by the increased deficits they would cause, according to the Congressional Research Service and the CBPP.   

The dividend and capital gains cuts are far more important to the rich, who derive a significant portion of their income from dividends and capital gains, than are the the Bush tax rate cuts, because they apply a 15% rate to income that otherwise would be taxed at 35%.  But precisely because they are so skewed to the rich, the dividend and capital gains cuts are much less popular and can pass this time around only with the debate and amendment restrictions of a Budget Reconciliation Bill.  They would probably lose in the Senate if put to a vote under the normal rules, as happened in the Senate Finance Committee.   

The GOP is thus apparently electing to pass the dividend and capital gains rate cuts now, even though they are not really needed, because this may well be their last chance to do so.  Next year is an election year, and control of Congress may conceivably slip out of their hands.  In all likelihood by 2007, especially if the war costs continue, the talk will be of tax increases, not cuts.  So lock in those cuts for the very rich now while they can.  If pressure is intense enough, there will be some fix for the AMT next year.   Otherwise, 15 million taxpayers will find after the midterm elections that they are going to be paying thousand of dollars more in taxes so that a few thousand very wealthy households can enjoy a huge tax break.  And, as always, the pro-family GOP will pass the eventual costs on to the next generation through the cumulative debt.

Comments

[Meteor Blades]

Watch these guys. It will be 1993 all over again if the Dems regain Congress and try to reverse any of this grotesque upward income redistribution. According to Republican spinners, '93 was the year of the largest increase in history.

“The largest tax increase in the world,” said Representative Deborah Price, an Ohio Republican.

“The largest tax increase in the history of civilization,” ranted Representative Philip M. Crane, an Illinois Republican.

Of course, with inflation figured in, Ronald Reagan's tax increase was the largest ever. But that little arithmetic problem aside, what's avoided in the rightwing cant is who mostly got taxed by Clinton's increase.

After that increase, people earning all the way to $140,000 in taxable income paid less after Clinton's than before in income taxes. It's true, the "average" taxpayer paid $1,500 more in income taxes per year. But that sleight-of-hand mixes billionnaires with minimum-wage earners. The only real increase everyone paid was for the gasoline tax.

[emptywheel]

Ah, but how do we show this visually when teevee won't even show the people who work the service jobs?

I remember several years ago showing my students La hora de los hornos. It included a whole bunch of UN stats about disparity of wealth in Argentina in the late 1960s.

The American students in the class (there were two from the Subcontinent, who had a different reaction) all came out of it saying, well, gosh, if one percent of the country held 40% of the wealth, I'd be that angry too.

I said, um, well...

But they couldn't, wouldn't believe it.

[emptywheel]

Well (she says, answering her own question), maybe one very visual way of explaining this is that people making less than $15 can't afford decent housing. That elementary school teachers and police officers and nurses--to say nothing of retail workers--can afford decent housing.

[Mimikatz]

And again, to help pay for this orgy of redistribution, the House passed the appropriation bill for education, labor and HHS. It cuts education programs and home heating oil subsidies. It passed 217-215, with Nancy Pelosi holding her caucus together yet again. At least there will be something for the Dems to run on, but this is an absolutely shameful performance by the Congress.