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House Passes Bill to Ease Alternative Minimum Tax

House Speaker Nancy Pelosi (D-Calif.) acknowledges House Ways and Means Committee Chairman Charles Rangel (D-N.Y.), left, at a news conference on the alternative minimum tax with Rep. Richard Neal (D-Mass.), second from left, and House Majority Leader Steny Hoyer (D-Md.).
House Speaker Nancy Pelosi (D-Calif.) acknowledges House Ways and Means Committee Chairman Charles Rangel (D-N.Y.), left, at a news conference on the alternative minimum tax with Rep. Richard Neal (D-Mass.), second from left, and House Majority Leader Steny Hoyer (D-Md.). (By Susan Walsh -- Associated Press)

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Because a full repeal of the tax could cost more than $1 trillion, both parties have opted for a temporary fix for the AMT.

But this year, Democrats added additional measures that offer a mortgage interest deduction to families that do not itemize their deductions and expanded tax rebates to working parents too poor to pay the income tax.

They would offset the cost largely by plugging a tax loophole that has been exploited by the burgeoning private-equity and hedge fund industries.

Private-equity fund managers earn much of their compensation by taking a cut of the earnings of the limited partners who invest in their funds. It is pay for work, N. Gregory Mankiw, a former chief economist for President Bush, has said. But it is taxed as capital gains, at 15 percent instead of the 35 percent income tax rate that they would otherwise pay.

"The tax subsidy each year to private-equity fund, hedge fund and venture capital fund managers is in the billions of dollars," William D. Stanfill, founding partner of Trailhead Ventures in Denver, told the Senate Finance Committee this summer. "But I think this special tax break is neither fair nor equitable."

Rep. John B. Larson (D-Conn.) said fewer than 50,000 households would claim this special tax rate. They collectively earn $935 billion, an average household income of $18.7 million.

But Republicans -- and a scattering of Democrats -- focused on the collateral damage, small real estate partnerships that spin off much smaller income, and whose partners vote in business-friendly districts throughout the country.

"I live in a community where these little partnerships are all over the place, and I know how these guys think," said Rep. Tim Mahoney (D-Fla.). "And I'm telling you right now, they're saying this is a tax increase, and they're saying this is Democrats being Democrats."

For the conservative "Blue Dog" Democrats, the bill was a particular quandary. They have long championed "paygo" rules demanding that Congress offset the costs of tax measures and new spending, calling themselves the new stewards of fiscal discipline. But they hail from districts where tax increases do not sit well. Yesterday's vote pitted their pledges of fiscal discipline against their political promises to stand against tax increases.

"We have led on paygo, and if we're going to lead on paygo, we need to practice what we preach," said Rep. Baron P. Hill (D-Ind.), a leading Blue Dog. "And while it may have been a difficult vote for a lot of Blue Dogs, it was the right vote."

Rep. Jim McCrery (La.), the ranking Republican on the House Ways and Means Committee, reasoned that Congress is simply trying to keep the taxes of 23 million families from going up. Since that is not really a tax cut, he said, its $52 billion cost to the Treasury should not be paid for. Besides, he said, the AMT was never meant to hit the middle class.

"Why don't we just admit the mistake and get rid of it?" he demanded.


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