A Bad, Bipartisan Tax Plan

By Sebastian Mallaby
Monday, January 8, 2007

Way, way back, which means before the midterm elections, the House Democrats waxed indignant about the rights of the minority party. When they assumed majority status last week, they barely gave Republicans a chance to speak, and all of Washington tut-tutted. Meanwhile, in the Senate, there was an outbreak of bipartisanship fit to make the angels sing. This posed a far more serious problem.

The outbreak came from Max Baucus, the new Democratic chairman of the Senate Finance Committee, and Chuck Grassley, the ranking Republican. Standing shoulder to shoulder, manfully defying the mad partisan cleavage of our times, the two senators called for repeal of the alternative minimum tax -- a prescription so fiscally crazy that not even the Bush administration supports it.

To appreciate the full awfulness of this idea, start with the broad tax picture. The Bush tax cuts are set to expire in 2010, so there's going to be a loud debate about whether to extend them. Meanwhile the alternative minimum tax, which was devised to ensure that millionaires don't escape taxes through excessive deductions, is catching more and more families in its net. Back in 1970, just 20,000 households paid the AMT. This year 23.4 million are expected to be hit by it.

Nobody likes the AMT. It penalizes families with children, and it requires taxpayers to calculate what they owe twice: You crunch the numbers under the usual tax rules, crunch them again under AMT rules, then pay whichever bill is bigger. But the spread of the unpopular AMT creates a political opening. Coupled with the expiration of the tax cuts in 2010, it gives Congress two reasons to rethink tax policy.

The Baucus-Grassley idea would waste this opportunity. The senators don't want to reform the AMT or link its repeal to wider tax changes; they just want to abolish it. This would destroy the chance to say to voters: Look, we're not going to extend all the tax cuts we gave you in 2001 and 2003, and while we're at it we're going to reduce the mortgage-interest deduction and other egregious loopholes so that we can collect more revenue without discouraging work by raising your tax rates. But wait, don't get too mad; at least we're going to kill the AMT for you.

Repealing the AMT would preempt that sort of bargain; but it would also be bad on its own terms. For all its administrative clunkiness, the AMT is wonderfully progressive: 90 percent of its revenue comes from those earning more than $100,000 a year, according to the nonpartisan Tax Policy Center. Last week Baucus denounced the AMT as a "monster in the tax code" -- a "Frankenstein," no less. But in an era of rising inequality, you don't slay progressive monsters casually.

Then there is the question of paying for repeal, which would cost a whopping $750 billion-plus over a decade. Last week both parties proclaimed that they had truly, honestly forsworn budget-busting proposals: The Bush administration announced a plan to come up with a plan to balance the budget three years after it leaves office, while the Democrats announced that they would live by rules under which any tax cut or spending proposal must be paid for with an offsetting measure. In one cruel swoop, AMT repeal would bury these green shoots of responsibility.

Baucus, to be fair, says he wants AMT repeal to be "fiscally responsible." The trouble is that his favorite way of generating revenue -- redoubling efforts to collect unpaid taxes from shirkers -- is not going to yield anything like enough to finance AMT reform. If the senator has other revenue ideas, he's not mentioning them.

Meanwhile, Grassley is cheerfully indifferent to the deficit. He dismisses calls to offset the cost of abolition as a "trap": "It's unfair to raise taxes to repeal something with serious unintended consequences like the AMT," he complained last week. But the consequences of the AMT -- namely, rapidly rising revenue -- are not exactly a surprise, least of all to the senator. They have been part of the budget projections that Grassley used to justify his support for the Bush tax cuts.

The nation's fiscal destiny is going to depend on a few big things. It's great that pork-barrel "earmarks" are at last being criticized by both the president and Congress, but the most serious challenges lie elsewhere. They lie, first, in the federal health and retirement programs, whose costs threaten a crackup; and second, in the tax system, which needs to bring in extra revenue while reducing inequality and not injuring the work ethic. Senators have no business sitting on the Finance Committee unless they are grappling with these problems day and night. But Baucus and Grassley have set out to make a solution harder.


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