No Pay, No Patch

Thursday, November 8, 2007

NEARLY EVERYONE wants to "patch" the alternative minimum tax. Not everyone wants to pay to do so. That is the challenge facing lawmakers as they race to install yet another temporary fix on the tattered federal tax system in time for the Internal Revenue Service to produce forms reflecting the change. How this job is accomplished will show whether congressional Democrats are willing to live up to the pay-as-you-go obligations they imposed on themselves when they retook control of Congress -- and whether Republicans can regain any credible claim to being committed to fiscal discipline.

The alternative minimum tax was created in 1969 to dun a tiny number of the super-rich who managed to avoid paying any income taxes. Because the tax isn't indexed for inflation and because the 2001 tax cut lowered regular tax rates, the AMT, without adjustments, will affect millions of taxpayers who everyone agrees were never its intended targets. But exempting those millions will cost a lot in forgone revenue, money that the Bush administration has built into its budget numbers. Because fixing the problem is expensive and complicated, lawmakers have chosen for years to slap a Band-Aid onto it -- and bill the cost to future generations. This year's model totals $50 billion, $76 billion when the cost of extending expiring tax provisions and other changes is included.

To its credit, the House Ways and Means Committee has produced an AMT patch whose costs are offset by other changes, including eliminating the carried-interest deduction that allows private equity and hedge fund managers to pay taxes at far lower rates than other wage-earners. This is far from a perfect solution: It would take 10 years of revenue to pay for the one-year patch.

It's preferable, though, to the approach of congressional Republicans and the Bush administration, which is to not offset the tax cut with new taxes or spending cuts. House Minority Leader John A. Boehner (R-Ohio) was illustrative of the irresponsibility. "Tax relief pays for itself by creating more American jobs for more taxpayers to strengthen our economy," he said in a statement. Perhaps Mr. Boehner believes that the Tax Fairy will simply leave $50 billion under the IRS's pillow; there is no economic basis for his statement that "tax relief pays for itself." Moreover, if Mr. Boehner doesn't like the way Democrats propose to finance the patch, what would he cut instead?

Republicans may not be the only obstacle to responsibility. Senate Democrats say they want to comply with the pay-go requirement, and there were hopeful signs last week from Majority Leader Harry M. Reid (D-Nev.). "I'm not in favor of waiving pay-go rules," he said. "I think we cannot waver on that." But Senate Finance Committee Chairman Max Baucus (D-Mont.) has been less definitive, saying only that he'd like to comply with pay-go to the extent possible; he has also not been eager to close the carried-interest loophole. Once the pay-go rule is ignored, though, lawmakers won't be able to discipline themselves in the future. This is a key test for the party that wants to wear the mantle of fiscal responsibility.

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