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Saturday Soundings

NLT readers living in regions with insulation requirements above R-19 are probably, like me, still chipped out from under six inches of ice covering everything. In the midst of this, today’s Washington Post offers this profoundly insightful bit of news analysis: "The storm’s effects were compounded by high winds that ripped off tree branches and brought down ice-coated power lines. Authorities are unable to stop this. . ." What? "Authorities are unable to stop this"?? What do we pay our taxes for?

Did you know that Eric Clapton owns a rehab center? In Antigua? Supply your own punch lines.

Finally, MKM Partners, a Greenwich investment firm, notes in a recent newsletter that federal tax receipts are currently growing much faster than federal spending, so much so that if the current rate keeps up, the federal budget will come into balance by May 2008. Just in time for a tax increase.

Discussions - 11 Comments

Steve, I recall that you like Charley Rangel, and wonder if you saw his middle-class tax relief proposal as mentioned in yesterday’s WSJ? He wants to adjust the AMT. I wrote about it here yesterday, which I mention so as not to write about it again, here.


I would add that the problem with adjusting the AMT is that it brings in so much revenue just as it is, since it clobbers the middle class. It might mess with your noted balanced budget. Or maybe Rangel would like to press the tax change through in order to unbalance the Bush budget. Such a thing would look bad for some folks right before an election.


My husband, a flat tax proponent, suggests that we could just eliminate other taxes and tinker with the AMT, both rates and income levels that would be subject to the tax, until it covers total revenues, since it IS a flat tax, and already in place.

Your partial quotation from the Post article, while creating a handy straw man (or ice man?) to knock down a la Norquist, leaves a false impression as to what is inferred as possibly preventable. The full quote reads as follows:

"The storm’s effects were compounded by high winds that ripped off tree branches and brought down ice-coated power lines. Authorities are unable to stop this unless they spend millions to place power lines underground." That is, if the power lines were placed underground, they would not be susceptible to being downed from wind and ice.

I just knew that someone without a sense of humor would jump at the whole Post quote and complain, and Jim comes through in less than 90 minutes, a new trolling speed record. I would only quibble that power companies, being private entities, are not "authorities" in the usual sense. Underground power lines are not paid for by taxes, except in unusual circumstances.

Kate: Yes, indeed the thought that we just let the flat-rate AMT replace the regular income tax over time has been mentioned by a number of people before. Much to ponder here.

At the risk of being called a "troll" again (Oh no!! Maybe you should just be grateful someone reads the blog?), I’ll point out that you were the one who asked, in your original comic observation "What do we pay our taxes for?" so it appears that you’re quibbling with yourself...

#2&4--Jim: I pay taxes so that the government can take control of the weather, therefore preventing any such inconvenience as snow, wind, and ice from discomfiting my everyday existence. What’s your excuse? ;-)

Hint: Lighten up a little. I think Steve was poking fun at the idea that the "authorities" seemingly always have the answers to our "problems," no matter that the weather is the source of the problem--not the power lines.

Kate:

I thought I would respond to your AMT observations/notes. The AMT allows a lot of budget chicanary, and it will never replace the income tax overall as it would result in a large tax increase on the middle class (unless you favor that?)

Bush’s budget projections predicting no deficit by 2012, or whenever, assumes that the AMT will NOT be "fixed." Obviously this assumption is false, but the AMT is handy to keep around in order to sell the budget.

I would favor a flat tax due to lower transaction costs, but any flat tax based on AMT rates would result in the middle class paying MORE taxes. The lowest rate of the AMT (it has two official rates) is 26%. Of course most middle class families do not pay 26% in taxes. The marginal rate is 25% until $60,000 or so, and by the time you add in other middle class tax breaks, such as IRAs, Child Tax Credit, Education Credits, etc. the actual rate is probably closer to 20%, if not lower given the progressive nature of the income tax.

Do not expect a long term fix for the AMT. Politicans enjoy playing chicken with it each year, since it is the "atomic bomb" of the income tax world. Republicans were trying to attach the repeal of the estate tax to the AMT adjustments for 2006, but could not get that through and had to give up. The AMT adjustment is often used to enact many less controversial laws though. AMT chicken has become so bad that it was not fixed for 2006 until July 2006. This obviously makes tax planning harder, but it keeps tax attorneys and accountants happy.

Steve Sparks, to me the most interesting point in the article was that Charles Rangel was the guy talking about doing something to fix the AMT. Yes, when Republicans would try to do something they could be shut down because it was about "the rich", when, as the article points out, it is the middle class that it hurts the most. Isn’t the main problem in states with high state income taxes, when the taxpayer deducts that state’s income taxes, and finds that deduction triggers the AMT? The AMT was supposed to be a counter against tax-sheltering deductions, so those tax breaks you cite would actually push a household into AMT territory.


But if the Democrats wish to win over the middle-class in the next presidential election, doing something about the AMT could improve the PERCEPTION that Democrats are the party of taxation. Based on the charts I am looking at in that article, the AMT IS a big tax increase on the middle class, which, no, I do not favor.


I favor a VAT or national sales tax, or any tax that does not require the citizen to prove his innocence when it comes to paying taxes. Ours is called a voluntary tax system, but given withholding it is not, and given that the tax code is SO complex, that an error in a person’s understanding of the tax code, or even a difference of opinion in the wording, can send him into ruinous penalty-land, or to jail, it is not. A flat tax is fine, but I do not think it addresses that issue.

Kate:

You are correct in your observation about the deduction of State income tax often leading to AMT liability. Large families often run into AMT problems as well because they have 5,6, or 7 personal exemptions (at $3,300 a piece) that quickly add up.

Piggybacking off of your State income tax point: Bush has never aggresivley sought to reign in the AMT. National review talks about it from time to time. One reason I have heard through the tax professional grapevine, is that liberal states such as CA, NY, and Mass have high income taxes, which tends to trigger the AMT, while more conservative states, such as TX do not have an income tax at all, so the AMT is not an issue. In terms of swing states, OH has a high tax, and therefore AMT hurts it, while FL has no income tax, so AMT is not much of an issue.

Note who wants to reform the AMT, Rangel, a guy from NY. What he wants to do is fix the AMT so States can tax more, with the federal govt getting less. Rangel does not care so much about less taxes, what he wants to do is allow NYC to keep its high tax rate so it can control its money (federal grants always have strings).

The Tax Code of 1986 attempted to eliminate the State Income Tax Deduction, and Rangel freaked out and fought to keep it in. He knows the tax policy of his State: make the federal govt subsidize NY’s high taxes.

Steve, from the article:


Rep. Richard Neal (D., Mass.), tapped by Mr. Rangel as the House Democrats’ point man on the issue, declined to comment on what specific direction he wants to take on the AMT, saying only that he is seeking an "egalitarian" approach. Mr. Neal has in the past proposed eliminating the AMT altogether, and making up for the lost revenue with graduated income-tax increases for households with incomes of $120,000 a year or higher.


But this year, House Democrats have reinstated 1990s-era budget rules that lapsed under Republicans -- requiring new tax cuts to be offset by equivalent tax increases or spending cuts. Senate Democrats have indicated they will do the same. And that, in turn, is leading to the bigger debate about the Bush tax cuts. Democrats are gearing up to make the case that many middle-class families wouldn’t fully benefit from those tax cuts because of the AMT -- and thus, it’s a matter of fairness to modify the AMT, possibly by undoing some of those cuts.


You might be right, about Rangel, but I find it hard to believe that he cares all that much about the tax revenues of the state of New York. He has no control of the spending thereof, nor does it benefit him, politically, how it is spent. I have never seen evidence of Rangel being in favor less money going to the federal government. Have you?

Kate:

The evidence was his reaction to the 1986 Tax Code that eliminated Deduction for State Income taxes. The AMT does the same thing as the proposed 1986 Code did.

I think you take too narrow of view of politics. Do you think people in the House of Reps, just wander off to DC and never talk to State politicians? How do you think all of this pork gets passed? House of Reps politicians have to keep State politicians happy in order to fend off primary challenges, get the local support of the party, etc.

Steve:

I needed to go look at a map of Rangel’s district, because I thought I knew the extent of it, but wasn’t sure. I lived there, in Harlem, for a summer a few years ago and was recalling the number of signs I saw saying, roughly, "Your Federal Dollars at Work" (although, you’re right, there were plenty of projects with state and city money up there, too.) which meant that Charley was doing a good job for his district when it came to bringing federal dollars back home. Could he have a safer seat?


But I am quibbling, when I expect you are right.

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