The Iowa Department of Revenue is taxing jack-o'-lanterns this Halloween.
Methinks, Renee must be a Democrat...
The great philosopher Waylon Jennings once said, "There ain't no right way to do the wrong thing." Congress should take this to heart when it comes to fixing the Alternative Minimum Tax (AMT).
Both Republicans and Democrats agree that the exploding AMT is bad news for taxpayers and the economy, and its growing burden creates a political constituency for tax reform. This is especially true in high-tax blue states like California and Connecticut, where a growing number of Democrats have a serious AMT problem. That's a bit of irony, since the AMT was their 1969 scheme to raise taxes on a handful of "super-wealthy" by creating a parallel tax system. Because the AMT was not indexed to inflation then, this year it will raise taxes for 24 million Americans unless Congress acts quickly.
That's the leverage House Ways and Means Chairman Charlie Rangel (D., N.Y.) wants to use to force a sweeping tax increase and income redistribution plan through Congress. The legislation is misleadingly titled the "Tax Reduction and Reform Act of 2007." Its informal moniker, "the mother of all tax reform," gives us a better sense of the profound impact it will have on American taxpayers and the economy.
Mr. Rangel's bill starts simply enough with a one-year extension of AMT relief provisions. However, the Democrats have sown the seeds for additional taxes with their "paygo" rules, which require all tax cuts to be offset by revenue increases elsewhere. For a temporary $40 billion AMT fix, Mr. Rangel has targeted one of the more productive and dynamic sectors of our economy -- the financial-services industry -- with several new provisions that will increase taxes, including higher taxes on so-called "carried interest," which will affect hedge funds and possibly other partnerships.
Beyond this year's temporary AMT patch, Mr. Rangel's bill would permanently end the AMT in 2008. That's a good idea, but the static price tag for this "relief" is where the trouble starts. Mr. Rangel's bill increases tax rates by 4% on individuals earning above $150,000 and couples earning over $200,000. This increase will come on top of the rollback of the 2001 and 2003 Bush tax cuts. The combined result: America's top income-tax rate will skyrocket from the current 35% rate to a top rate of 44%. Let's be clear -- that's a 25% tax hike.
So much for low-tax America and high-tax Europe; this would put the nation's top rates among the highest of all developed nations. This is an especially heavy burden for American farmers and small businessmen who pay taxes as individuals. According to an Oct. 25 memo from Ways and Means Committee Ranking Member Jim McCrery (R., La.), the net result will be the biggest tax increase in U.S. history, totaling $3.5 trillion in higher taxes over the next 10 years.
Mr. Rangel does shuffle the corporate-tax code, dropping the top rate to 30.5% from the current 35%. It's rather refreshing to see that he recognizes that America's corporate-tax rate is too high and hurts our competitiveness. But this glimmer of progress is swamped by the plan's range of new taxes on capital investment and punitive measures towards American companies that operate globally.
Contrary to its deceptive name, Mr. Rangel's bill is not tax relief, but a breathtaking tax increase. And it is not tax reform, but just another round of new complexity layered on top of the existing tax code, with tweaked provisions, changed definitions and redistributed income to favored groups through carefully crafted new subsections. Compliance with the 60,000-page tax code costs Americans seven billion man-hours and over $140 billion in fees to accountants and consultants, all before a single check is cut to the government. While the AMT may be repealed by this bill, the inefficiencies and burdens that keep Washington lobbyists employed full time remain.
Thankfully, there's an alternative to Mr. Rangel's redistributive approach, and it's being offered by a group of pro-growth tax reformers in the House of Representatives. "The Taxpayer Choice Act," is being offered by Reps. Paul Ryan (R., Wis.), Michele Bachmann (R., Minn.), Jeb Hensarling (R., Texas), and John Campbell (R., Calif.) that repeals the AMT while fundamentally reforming the tax code.
These young Republican legislative entrepreneurs offer taxpayers the choice of remaining in the current system with its itemized deductions, charts and schedules, or moving into a greatly simplified system that eliminates all deductions and loopholes while offering only two simple rates. All taxpayers would have a standard individual deduction of $12,500, and individuals earning below $100,000 would pay a flat 10% of income, while individuals earning above that would pay 25%. Calculating taxes would take less time than brewing a pot of coffee. [QA: Republicans should jump all over this idea!]
Last year I observed on this page that, on fiscal policy, voters could not see a dime's worth of difference between the two political parties. How things have changed. Mr. Rangel's mother-of-all tax increases is another of the same, tired, "tax-the-rich" revenue-raising schemes of past Democratic Congresses. It focuses on redistributing income through the tax code at the expense of economic growth and tax simplicity. Such tax schemes have a high political-demagogy coefficient that can temporarily satisfy liberal constituencies, but they always backfire in practice.
In the early 1990s, I remember watching Sen. George Mitchell sing the praises of a new luxury tax that would "tax the rich." But as any Economics 101 student might have predicted, the immediate effect of this luxury tax was a sharp decline in sales of "luxuries," particularly new boats, and a dramatic loss of boat-related manufacturing and service jobs. It was less than a year before Sen. Mitchell was working to lift the tax so his constituents in boatyards in Maine could get back to work.
The Taxpayer Choice Act, on the other hand, is based on the belief that the only legitimate purpose of the tax code is to raise the revenue necessary to fund the legitimate expense of government; it is not a place for social engineering or rewarding favored political constituencies. It treats taxpayers with dignity, and moves us in the direction of eliminating double taxation, which encourages capital formation, savings and investment.
I have long advocated a tax code that is simple, fair, flat and honest. Income should be taxed once, and only once, thereby promoting economic growth through increased savings and investment. Sadly, Mr. Rangel's Democratic vision for tax policy takes giant steps away from that ideal. Republicans have a competing vision that offers taxpayers an escape from both the AMT and many of the heavy compliance costs of today's tax code.
This small step may still be too big for the income redistributors in our nation's capital. Until American citizens beat Washington bureaucrats and special interests, taxpayers will remain trapped in a tax code built by and for special interests. Finally, at least, they have a choice between two fundamentally different visions. Let's hope the taxpayer wins this debate.
Mr. Armey, Republican majority leader of the U.S. House of Representatives from 1995 to 2001, is chairman of FreedomWorks Foundation.
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October 26, 2007; Page A16
Internet consumers scored a victory in Washington last night, thanks to Senator John Sununu (R., N.H.), with big assists from Minority Leader Mitch McConnell (R., Ky.) and Oregon Democrat Ron Wyden. The Senate passed a seven-year extension of the Internet tax moratorium, with robust language that should stiff-arm even the most voracious state and local governments looking for loopholes to tax your email.
Mr. McConnell created negotiating leverage by forcing on to the Senate schedule a vote on Mr. Sununu's permanent Net tax ban. The last thing moratorium opponents wanted was to face an up-or-down vote on a permanent ban, which is why they recently cancelled a committee vote when it became clear they had underestimated the popularity of the tax moratorium. That's also why you can now ignore the letter on the preceding page, in which Senators Tom Carper (D., Del.) and Lamar Alexander (R., Tenn.) sing the praises of their short, loophole-ridden "moratorium" bill. They junked it last night and scrambled aboard the Sununu steamroller.
While accepting less than a permanent ban, Mr. Sununu and his pro-Internet allies won additional provisions authored by Mr. Wyden to protect consumers. A report yesterday from the Congressional Research Service revealed that the House had botched the drafting of its four-year extension by leaving open the possibility of new taxes on email services if they weren't marketed along with Internet access service. Kudos to Senators Sununu, McConnell and Wyden. If the House, as expected, passes the Senate bill early next week, President Bush can sign it into law before the current ban expires November 1.
October 25, 2007
By Ways and Means Republican Press Office
MEMO RE: “Mother of All Tax Hikes” Bill TO: Republican Members, Republican Staff FROM: Ways and Means Committee Ranking Member Jim McCrery My Friends,
At a bipartisan Ways and Means caucus last night, Chairman Rangel outlined his long-awaited “Mother of All Tax Hikes” legislation. The basics of the package are simple: This is the largest individual income tax increase in history.
The bill will add a 4% surtax on Americans earning more than $150,000 a year ($200,000 for couples). That is on top of the scheduled expiration of the 2001 and 2003 tax cuts. So, under Democrats’ plan, over the next few years, the individual income top tax rate in the United States This crushingly high tax rate will affect approximately 10 million taxpayers directly - including those who report business income, like small business owners and farmers - but the damage will ripple throughout our economy. Because small businesses and family farms often pay their income taxes as individuals, this is a massive tax hike on the engine that drives job growth in this country. In addition, the surtax is on adjusted gross income, not taxable income. This sounds like a technical issue, but it means that Rangel’s bill will erode the value of a series of tax deductions – including for mortgage interest, charitable giving, medical expenses, state and local taxes, and the standard deduction. And, because the surtax kicks in at $150,000 for individuals and $200,000 for couples, the bill creates a monster of a marriage penalty. Chairman Rangel will claim that these tax increases go to provide tax cuts to 90 million Americans, but he is selling pure snake-oil. Many if not most of those taxpayers are getting a purely imaginary “tax cut.” Some of them are the roughly 20 million people that Republicans shielded with the Alternative Minimum Tax patch. Millions more are people who have benefited from the 2001 and 2003 tax cuts, and only get “tax cuts” if you assume that the 10% bracket, marriage penalty, and $1,000 per child tax credit will expire. Others, like single people who will now be eligible for the Earned Income Tax Credit, are getting a tax refund from the government even though they don’t actually pay income taxes. It will take time to analyze this bill and sort through the data, but we know from the start that the 90 million figure is pure hokum. In fact, before you know it more taxpayers may wind up paying higher taxes – and fewer paying less - under Rangel’s plan than they did last year. Which brings us to the larger fallacy of the Democrats’ “paygo” system. There is no need to “pay for” protecting taxpayers from a massive AMT tax hike. The government never meant for the AMT to affect middle-class Americans, and we have a responsibility to make sure it doesn’t. By arguing that preventing this tax increase requires us to raise taxes elsewhere, Democrats are trying to lock Congress into a system where we are guaranteed to raise taxes by $3.5 trillion over ten years. That’s right. $3.5 trillion. The baseline that the Democrats are using for “paygo” includes revenue from an “un-patched” AMT and from the tax increases that occur when the 2001 and 2003 tax laws expire after 2010. Together they total $3.5 trillion over ten years. If we play by the Democrats “paygo” rules, that is the size of the tax increase we are imposing on the American people. That will hurt our nation’s competitiveness and cost us American jobs. The Rangel bill is the first step down a road none of us want to follow, and I urge you to oppose it strongly. ###
'The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital . . . the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy."
John F. Kennedy, 1963
When it comes to taxes, Barack Obama is no Jack Kennedy. The Illinois Senator recently announced that he wants to raise the capital gains tax to restore "fairness" to the tax code.
That makes it a three-peat: All of the leading Democratic contenders for President have endorsed higher taxes on stock ownership. Hillary Clinton is the "moderate" in that so far she'd merely raise the tax to 20% from the current 15% -- a 33% increase. John Edwards and Mr. Obama want to nearly double it, to 28%.
![[Gainful Economy]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_sgj470Ziw-AdMr4mw9n8BOx1AN9GBiHljdT7CSyWKAa2dzXH-wyfgt-0U73A8-eTTPWbhAZ4vrVvRbUukZgov8iLiGf2XvfavGKDZuW2p9qW8VaS9lstYSxIq9rsHRV2XJhSd7p7Fye1xYkeQ6Oo-bwUs=s0-d)
This would repeal not only the Bush capital gains tax cut of 2003 but also the 1997 bipartisan tax cut signed by Bill Clinton, which cut the rate to 20% from 28%. In explaining his proposal, Mr. Obama ignores JFK's arguments about economic growth and instead plays the envy card: "For decades, we've seen successful strategies to ride antitax sentiment in this country toward tax cuts that favor wealth, not work."
But it's not only the wealthy who will take a hit from higher capital gains taxes. Recent surveys indicate that roughly 52% of American adults own stock in some form, and last year 8.5 million of these investors paid a capital gains tax. The value of those assets will decline if capital gains taxes go up because financial markets instantly capitalize higher taxes on stock profits into lower stock prices.
We saw this effect in May of 2003 after the passage of President Bush's investment tax cuts. An analysis by the investment advisory firm Strategas shows that stock values rose by 10.3% in the following weeks, and over the last four years the net worth of Americans's stock holdings has increased by some $6.2 trillion. Economic growth was the largest driver of stock prices, to be sure, but a higher after-tax return on capital also played a role.
Taxing capital gains at a lower rate than ordinary income is a long-established policy to encourage risk taking and investment. Since we already tax corporate earnings at 35% through the corporate income tax, taxing those profits again when the stock is sold imposes a double tax on risk capital. That's why 12 industrialized nations, including Hong Kong and Korea, impose a zero capital gains rate.
The differential rate also compensates for the fact that the tax applies to the value of inflated capital gains, rather than the real gains. Former Federal Reserve Board member Wayne Angell discovered that between 1973-1993 the majority of gains from stock sales were a result of "phantom gains due to inflation." The tax code also taxes people fully on their gains, but only allows a $3,000 deduction each year on losses. The lower capital gains rate makes up in part for that failure to deduct losses from risk-taking investments.
Mr. Obama is wrong when he assumes that the returns to capital accrue exclusively to rich investors. A study by former Treasury Department economist Gary Robbins has found that from 1946-1998, about 90% of the returns to capital investment accrued to workers in the form of higher wages, because when workers have more tools like computers, forklifts and robotic equipment, they produce more.
Ah, but won't the Treasury benefit from a revenue windfall? Almost certainly not. For the past 40 years, capital gains tax increases have been associated with a decline in tax revenues. Rate cuts have generated more tax collections. One reason is that higher rates give investors an incentive to hold their assets to avoid paying the tax. The capital gains rate was last raised in 1986. Revenues from the tax tripled in the year before the increase, as investors cashed out of assets before the window of the lower tax rate slammed shut. But in each of the five years after the rate jumped to 28% from 20%, capital gains revenues remained below the pre-1986 level, according to a study by the National Chamber of Commerce Foundation.
Conversely, the 1997 capital gains tax cut had a stock market unlocking effect. Congress's consistently mistaken Joint Committee on Taxation predicted that the government would collect $195 billion from 1997 to 1999 from capital gains payments. The actual amount was $279 billion. In other words, the lower tax rate raised $84 billion more than expected -- which is one reason the late 1990s produced budget surpluses. Most recently, as the nearby chart shows, the 2003 tax cut produced a doubling of tax receipts to $97 billion in 2005 from $47 billion in 2002. That's twice what Congress predicted.
Every generation or so, it seems that the American political class has to re-learn these tax policy lessons the hard way. What's especially striking about this year's Democratic economic proposals is how little any of them mention economic growth. Their message is "fairness," inequality and income redistribution. They seem to think taxes can be raised with ease, and no one's behavior or investment choices will change. Jack Kennedy knew better.
