Tuesday, July 19, 2011

Could ending the AMT square the circle?

A clue here, I think, to why the sudden revival of the Senate Gang of Six's deficit reduction plan, modeled on Bowles-Simpson, won a "surprise jolt of bipartisan support" when presented to 50-odd Senators:
A key question remains whether the plan might receive any support in the House, where Republicans have strongly resisted any new proposal that could bring in new taxes. The gang's plan would bring in $1 trillion in new tax revenue over 10 years by narrowing several tax breaks. But Mr. Conrad said it would also lower tax rates and end the alternative minimum tax. He said the combination of tax changes would be viewed by budget experts as a $1.5 trillion tax cut (my emphasis).
Ending the AMT allows Republicans to wriggle out of Grover Norquist's no-new-taxes-ever straitjacket, as Jonathan Chait explained with regard to a somewhat smaller package that also proposed to offset modest tax and fee hikes by ending the AMT:

The AMT has, over the decades, inadvertently grown to a point where it hits non-rich taxpayers, especially ones in high-tax states. Congress has responded by continually passing "patches" that keep the AMT from growing. Since these patches are passed generally a year or two at a time, the law assumes that the AMT will continue to grow in size and raise taxes at lower and lower income levels. The AMT is one of the differences between the budget baseline that assumes current law, and which shows the deficit falling to a modest level -- and the budget projections that assume current policy.

So according to Newton-Small, one possible deal will raise a lot of taxes, but offset the revenue by permanently fixing the AMT. That way, conservatives can say that they didn't vote for a net tax hike -- they just voted to close some loopholes and plow the revenue back into other tax reductions. This allows them to avoid contradicting their sacred pledge to Grover Norquist never to support a revenue increase.

But wait, you ask! How does this help the deficit problem?

The answer is that if you assume that Congress will continue to patch the AMT year after year anyway, then the revenue loss from that "tax cut" isn't real. You're just accounting for revenue that would be lost anyway, but paying for it rather than financing it with debt. In other words, you're turning a future assumed debt-financed tax cut into a future paid-for tax cut. That's genuine budget savings.
Chait has a good track record scoping out political endgames (though I think he has a blind spot regarding Obama's willingness to let all the Bush tax cuts expire). Perhaps here too he's right in substance -- that in one wrapping or another, ending the AMT will square the no-new-taxes circle.

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