Taxing Democrats

Michael Barone:

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... Democrats have sworn to reintroduce "pay-go" rules on tax cuts. That's a backward-looking move: It would have made it harder for recent Republican Congresses to cut taxes. But it will force Democrats, if they want to cut low earners' tax rates or extend the middle class portions of the Bush tax cuts beyond 2010, to find compensating spending cuts or tax increases.

It will also make it harder for Democrats to do something they must do for political reasons -- adjust the Alternative Minimum Tax. The AMT was passed in 1969 to ensure that no one could totally avoid taxes. It sets up a separate income tax system, without many normally applicable deductions. Because it has not been indexed for inflation, it's slated to apply to rapidly increasing numbers of taxpayers with incomes around $100,000 and lots of deductions in high-income Democratic states like New York, New Jersey, Connecticut, Illinois and California.

Congress has been adjusting the AMT year by year. The high revenue projected in out-years makes it impossible to abolish under the pay-go rule, and even an annual fix is very expensive. But an important Democratic constituency -- public employee unions -- has a vested interest in adjusting the AMT. AMT taxpayers can't deduct the high state and local income taxes in these states, and may be motivated to vote to cut the state and local taxes that are the public employee union's lifeblood.

Democrats may be able to pass bills raising taxes on high earners and raising the 15 percent rate on capital gains and dividends. But such bills are almost certain to be vetoed, and the response to the 1993 Clinton tax increases suggests that "soak the rich" is not a sure winner in elections.

Increased deductions or tax credits for college tuition is on the Democrats' to-do list and would certainly be popular with beleaguered parents. But colleges and universities have been sopping up previous tax breaks by raising tuitions at above-inflation rates, and presumably would do so again.

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Look for them to raise taxes to pay for Social Security shortfalls. The AMT was their creation and they appear stuck with it. It is curious that when the Republicans indexed the rest of the tax code they were not able to index the AMT. Perhaps they knew it was being paid mostly by Democrats. Barone thinks they may also try to do something with 401K's that would look a lot like the Bush proposal for invested Social Security benefits. Perhaps they will try to tie it to the tax increase they want. They still do not have the votes to get past a veto of the straight up tax increase they would like.