Last week the House Ways and Means Committee reported a bill (H.R. 3996) that would, among other things, prevent the alternative minimum tax from slamming middle-income families. That’s the good news. The bad news is that this bill (like its mother) is packed with ill-advised tax hikes, ostensibly to satisfy the Democrats’ pay-as-you-go rules.
The apparent assumption here is that the government is somehow entitled to the massive tax hike that the AMT represents under current law — a tax hike that was unintended and most lawmakers agree should be contained or eliminated. But a closer look at H.R. 3996 shows that Democrats are more concerned with appearing to follow their own rules than actually following them.
The Democratic pay-as-you-go imperative requires that tax cuts be balanced, based on static scoring from the congressional Joint Committee on Taxation, with tax hikes or spending cuts. Spending cuts are rarely considered in practice, so the rule in fact means that tax cuts must be paired with tax hikes. Under the Democratic interpretation of the AMT, preventing a tax hike, even one that is unplanned and unintended, requires substituting another tax hike in its place. That’s in principle. In practice, however, H.R. 3996 uses a timing gimmick to satisfy nearly half its revenue requirement under pay-as-you-go: It shifts $37.8 billion in corporate tax revenue from outside the budget window in fiscal-year 2013 to fiscal 2012.
Given the willingness of Democrats to so brazenly comply with pay-as-you-go only in the barest technical sense, there must be some other motivation for the inclusion of significant, permanent tax hikes in this bill. A look at the specific tax hikes — the two biggest are a tax increase on offshore deferred compensation (which would affect hedge funds the most) and a tax increase on carried-interest capital gains (which would target general partners in investment partnerships) — suggests that the motivation is traditional class-warfare; an ill-advised attack on some of our economy’s best and brightest that punishes them for their success.
The interaction of the AMT and pay-as-you-go creates a toxic brew that nearly guarantees steeply higher taxes if left unchallenged. Whether we go through an annual process of piecemeal tax hikes to pay for one-year patches, or pass some tax-hiking Frankenstein’s monster, American families will face higher tax penalties, lower economic growth, and fewer jobs with lower wages.
Pro-growth members of Congress can pursue an alternative route, however. They can argue that the government is not entitled to the massive tax increase represented by the AMT, and vote to repeal it outright or in the context of a broader pro-growth tax reform. (One such reform is H.R. 3818, the Taxpayer Choice Act, sponsored by Rep. Paul Ryan of Wisconsin.) The argument for preventing the AMT tax hike is the same as the one for averting the expiration-of-the-Bush-tax-cuts (which would be the equivalent of a massive tax hike) at the end of 2010: Whether a tax hike occurs because of a new law or an old one makes no difference to the taxpayers who have to pay higher taxes. Lawmakers should therefore repeal both of these scheduled tax hikes outright, without replacing them with new taxes, and thereby hold the line on taxes.
But this is a longer-term struggle. In the short term, members of Congress should simply reject the approach of H.R. 3996 and pass an AMT patch without any tax hikes. They can waive or scrap the pay-as-you-go rule in the process.