17 November 2005

Tax Bill Follies.

Ironically, in the current Congress, the House is the chamber controlled by the wealthy elite, while the Senate is comparatively populist. The differences between the Senate's tax bill and the House tax bill illustrate the differences starkly.

The House bill has as its centerpiece a two year extention of extraordinarily low tax rates on dividends and capital gains (which expire in 2008). The Senate bill mitigates the effect of the alternative minimum tax, which is poised to affect tens of millions of upper middle class families who never paid it before, provides tax relief to Hurricane victims, and makes a technical change in the way profits from oil sales are calculated in times of rising prices that has the effect of increasing taxes on oil companies who profited immensely from recent oil price increases, by about $5 billion.

Republican moderates rebelled at the idea of cutting taxes for investors at the same time they were voting on spending cuts for food stamps, Medicaid and programs to enforce payment of child support.

Ultimately, this disarray also has a long term source. When the Bush tax cuts were enacted in the President's first term, the cost of the cuts was artificially depressed by making them temporary rather than permanent tax cuts, and by not reducing the alternative minimum tax, effectively taking away with the AMT much of what was given with the tax cuts. They were counting on having more support for their goals now, after people had become accustomed to those tax cuts. But, blinded by the myth that these tax cuts would increase government revenues instead of leading to deficits, and hampered by the President's unpopularity on almost every issue, which has dragged down the Republican Congress as well, creating an every member for him or herself situation going into the 2006 elections, their gamble didn't pan out.

By creating a status quo in which all of the tax cuts go away, the Republicans have given Democrats, particularly in the Senate where legislation is much easier to block than to pass, a real chance to influence tax policy. We'll see how well the Democrats use that gift. Today, the prospects look encouraging.

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