Tax Cut Confusion

One to the many nice things about blogging is it tends to provoke me to look at what’s being discussed in print and on line, using that to shape the topic for the week.   Usually there’s something that emerges as worth more attention than I’ve given it – and that brings motivation to learn and then to share.  That said – I am burnt out on this tax the rich / jobs bill stuff.   I must admit part of my problem is that this is a complex issue.  So, in an effort to overcome my nascent attention deficit disorder and to better understand what is actually a consequential topic to my pocketbook, I am considering the following question.    Do tax cuts really help the economy? 

The Tax Foundation says not unless there’s a sense of permanence associated with the cut.  We all know that nothing is certain but death and taxes.  However the new twist on that is “what taxes and when” tends to be an open question.  The Tax Foundation article suggests the temporary nature of  the proposed payroll tax cuts is a problem.  The argument is, in an uncertain economy when it’s a one-time deal, tax cuts don’t stimulate the economy.  People are on a budget, and don’t expect things to get better, so rather than spend the “windfall” they put the money in an emergency fund.   

The question of whether tax policy is effective if it’s not permanent is a popular topic.  The blog A Taxing Matter takes issue with the pressure to make the R&D credit permanent arguing that companies that need to do research anyway shouldn’t get a special deduction for doing it.  The New York Times did a scathing piece on this topic earlier this month, targeting the video game industry.   In both these articles they argue the specific tax cut is bad, but ineffective when temporary.   The same Tax Foundation piece I referenced earlier uses that logic for saying a temporary tax cut to encourage jobs is useless.  When people with such different views come to essentially the same conclusion, it’s usually a sign they’re on to something.

The only missing piece I see in this discussion is that these temporary tax cuts aren’t being imposed from outer space.  We (since I vote I have to include myself in this group) keep electing people who see temporary tax cuts as a way to get re-elected.   As a mom I think we voters have to admit that the child- like behavior in Washington didn’t occur without our participation, and won’t stop unless we take appropriate action.

Speaking of being appropriate – I should mention that Christina Romer, whose work I cited last week as an argument against the tax hike portions of the jobs bill, has a piece in the New York Times Business Section today defending the bill.  (Though notably she doesn’t say good things about the tax hikes.)  Here’s the link if you’d like to know more.     

It's Patch Time for AMT

It was both good news and contributed to my apprehension to see the bi-partisan pledge to pass the AMT patch.  This patch is designed to adjust for inflation an essentially incomprehensible tax that is supposed to prevent millionaires from sheltering too much income.  It became law in 1969 without any adjustment feature, and that creates the need to repeatedly do something in Congress or create a situation where people who are far from millionaires end up paying extra taxes.  So far this year there's no legislation that addresses this issue, and since we're running out of days left in the year, the  Congressional leadership decided to issue this pledge.

The pledge is better than nothing, but it seems like it would have been easier to just pass the legislation in a timely manner.  Of course if there is a problem with getting the legislation passed, then this pledge looks like nothing more than good intentions.  And we know what road is paved with those.

The issue is not a small one.  A report released last week by the Congressional Research Service quotes the Tax Policy Center as projecting that without the patch, the number of taxpayers with small business income who fall into AMT will be higher than those who don’t.  This same report shows that sans patch the amount of small business income (this is the dollars not the people) that is taxed will be 4 times the amount that is taxed at the 36% bracket.  I don’t want to dismiss the Bush tax cut discussion around small business, but in terms of impact the AMT patch issue seems more important to business owners.  (Presumably people who sit on the tax related committees of Congress are thinking along the same lines, which prompted the “pledge”). 



If the proposed legislation passes, it would allow for personal credits against the AMT and the exemption amounts for 2010 to be set at $72,450 for those married filing jointly and $47,450 for individuals.  Without the patch legislation the exemption falls to $45,000 for joint filers and $33,750 for single filers.   

The Tax Policy Center blog points out that this waiting until the last minute is not new behavior. In fairness making the decision to add the patch will cost the government serious money. No patch and the result should be about $90 billion in total taxes. The Tax Policy Center estimates that about $70 billion of that goes away if the patch is in place. So you can see where there some natural foot dragging associated with passage. Still for those of us paying the tax (if there no patch the Congressional Budget Office estimates that 20 percent of all taxpayers and 40 percent of married couples will fall into AMT) the idea that this tax only impact millionaires makes this more of a foot stomping exercise.