Necessary Investment Incentives?
posted by Frank Pasquale
Pretty soon the alternative minimum tax is going to hit millions more taxpayers—even people making less than $50,000 annually. This extended reach will primarily harm those who work hard, pay property taxes, and have other deductions for things like dependent care, education, and health care. This AMT bite was never intended by Congress—it’s just reaching down the tax bracket because the figures it’s based on were drawn up decades ago.
You’d think this problem would be at the top of the tax reform agenda. Sadly, no. Rather, the big debate is over whether to extend tax cuts on investment income. As brilliant NYT tax reporter David Cay Johnston observes,
Among taxpayers with incomes greater than $10 million, the amount by which their investment tax bill was reduced averaged about $500,000 in 2003, and total tax savings, which included the two Bush tax cuts on compensation, nearly doubled, to slightly more than $1 million.
So this debate is basically about whether to make such windfalls permanent, or to try to stop our current fiscal irresponsibility and actually do something about our massive national debt.
But perhaps I misunderstand the issue. Is there a good policy reason for tax cuts for the superrich? Would they simply refuse to invest if better tax treatment weren’t given—choosing instead, perhaps, to roll around in vaults of money ala Scrooge McDuck? Would they renounce U.S. citizenship and move to the Isle of Man? I’m just trying to understand this policy on a higher level than positive political theory (which would, of course, predict that those best able to invest in money-intensive politics would get the highest returns). I guess I need to start reading the Tax Prof Blog!
April 5, 2006 at 10:23 am
Posted in: Current Events, Economic Analysis of Law, Politics
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Responses (4)
Dylan - April 5, 2006 at 11:00 am
The best argument for tax cuts on the very rich, which is almost never spoken, is moral. Those who resent annual corporate shakedowns of their employees for United Way donations probably feel some disquiet over the idea that the greedy middle classes should vote themselves bread and circuses at the expense of people who did nothing wrong.
anon - April 5, 2006 at 12:42 pm
The best argument is moral? Here’s a question, who benefits more from the United States government the super-rich or the middle class and poor?
Answer: the super-rich. The American government spends billions upon billions in taxes from the middle class to protect the investments of the super-rich. They negotiate beneficial trade agreements for the super-rich owners of large American companies. They defend American interests abroad diplomatically and in some cases with war.
While some of this windfall benefits the middle class and poor, most of it flows to the very selective few super-rich. Most of these rich have not even acquired their vaulted position by their merit, but rather through the merit of their parents or grandparents.
So, please save the morality argument, and stop pretending that one day you will be super-rich. Middle class America is getting bent over a barrel by the super-rich and they’re laughing at us.
Let’s also talk about morality. Here’s something that is conveniently overlooked: one of the seven deadly sins–GREED.
Here’s another blurb from the same NY Times article:
“These taxpayers, whose average income was $26 million, paid about the same share of their income in income taxes as those making $200,000 to $500,000 because of the lowered rates on investment income.”
I am sure the fat-cats who make $26 million a year in income advocated heavily for these tax changes. I think that we have reached the point when the super-rich being just plain greedy.
Its time for society to take the moral stance and keep them in check, else we will have the same landed aristocracy that destroyed Europe.
Bruce - April 5, 2006 at 3:46 pm
Frank, if they didn’t get a tax cut, the first thing they would cut out of their budget would be campaign contributions. It’s a bipartisan issue!
Maryland Conservatarian - April 6, 2006 at 1:50 pm
Actually, AMT reform is high on the tax reform agenda (despite differing implications by a certain “brilliant” NYT reporter). For example, last December the House passed a measure which would have extended AMT relief for at least another year but would “cost” an estimated $31 billion. The Senate included similar (actually a little less taxing) provisions but as part of their overall tax package. They are currently in conference for reconciliation on this (and other) matters.
However, overall reform is tough because (warning – extreme generalization follows) many Republicans want such reform as a stand alone (an actual tax cut) whereby many Democrats want the reform “paid” for with tax increases elsewhere (investments and capital gains).
One reason Democrats do like the idea of AMT reform is because AMT, as currently constructed, probably hurts Blue Staters more. This is because State Income & Property taxes are NOT deductible for AMT purposes. Eliminatinmg/altering AMT may make it easier to raise those taxes
A radical idea would be to eliminate the regular tax & just leave the AMT calculation intact as our tax system. It would be a lot simpler system as it would be a move to a flat tax.
Final notes: tax cuts are not “windfalls” – winning the lottery is a “windfall”; keeping what you already have is not…..and we do not tax the “super rich” per se, we tax the high-income earner…otherwise the likes of Ted Kennedy, Jay Rockefeller and John Kerry would not be enjoying the lifestyle they do if they were living off just their post-tax Senate salaries instead of their no-longer-taxed wealth…
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