The Corner

It Depends on What Your Definition of “Overcharge” Is

In case you’re having trouble sleeping at your desk today, let me offer another installment of my Alternative Minimum Tax (AMT) debate with Kevin Drum.

If you are like most people who know what AMT stands for, you probably think that its problem is that it was intended to catch only the very wealthy, but because it was never indexed for inflation, more and more middle-class taxpayers are being swept over its threshold. As a result of this oversight, the government is mistakenly collecting revenue that should be left with taxpayers.

If that’s how you see it — like I think most people do – then Drum and this blogger disagree with you. They maintain that the government did not collect enough AMT revenue last year, because Congress patched AMT, saving middle-class taxpayers billions of dollars. It is a mistake that they don’t want to see happen again. If AMT is to be fixed, we must raise taxes to make up for it.

Consistent with this line of thinking, congressional Democrats insisted this year that they would only fix the AMT if they could make up for it by raising other taxes by $81 billion. President Bush was not expected to sign such a bill, nor were Senate Republicans expected to go along. Majority Democrats were formally warned on October 23 that there was a hard deadline for doing this (they almost certainly knew about it earlier as well, I just found the written record of this in Treasury Secretary’s letter of that date). Yet they let the deadline pass for printing the affected IRS forms. Their lack of action will result in the delay of millions of tax refunds.

Drum simply has the history of the debate wrong, which I’ll get to below. As for whether we consider the Democrats’ AMT plan to be revenue neutral or a tax-hike, it depends on whether you believe that an overcharge is an overcharge.

Unless there was some conspiracy to raise taxes broadly at the time the AMT was created – and there is no reason for thinking there was — then it follows that all the extra revenue the AMT brings in by overcharging upper-middle-class people is just that — an overcharge. The passive and active voices are referring to the same thing: “I overcharge, you are overcharged.” I think it is fair to call this standard English usage.

In contrast, Drum embraces the logic of Ways and Means Chairman Charles Rangel — we may be overcharging, but there is no “overcharge” to speak of. If we’re going to save taxpayers from overpaying, then we have to make up for it by overcharging them (or someone else) somewhere else — i.e., we have to raise other taxes so that the government can continue to benefit from Congress’s mistake on the AMT.

If you patch AMT without a tax increase — which is what the Republicans wanted, and what the Senate voted to do the very second Democrats capitulated and offered this option — then it’s not as though the government will collect less next year than it did this year. After all, we had a temporary AMT “patch” last year, and the year before, and the year before, etc. If Rangel succeeds in raising taxes by $80 billion to make up for “losses” from AMT overcharges, then the government will be collecting a lot more money than before.

This is another example of “Pay-Go” budgeting, whose real idea is that we must meet an imaginary bottom line that never corresponded to anything in the real world to begin with. Under Pay-Go budgeting, Congress looks at a false projection that someone wrote on a piece of paper during the previous fiscal year and says: “This is it! This number is written in stone! It would be irresponsible to collect any less than this!” When in fact no one ever thought the government was going to collect that amount in the first place. In essence, it makes a higher priority of the State’s fiscal health than that of the economy.

Pay-Go would be great if it entailed spending cuts, but it never works that way. Congress simply cuts essential functions to pay for its ever-expanding scope of unnecessary projects, then puts the funds back into the necessary functions later with an “emergency” supplemental that is immune to budget rules. It’s an old game that Democrats play just as well as Republicans did.

That’s the accounting issue. As for the historical issue, I am only belaboring the point because (1) the Internet has no constraints for space, and (2) Drum went out of his way to make accusations of sloppiness and to impugn this entire blog when he was just plain wrong. In fact, the AP and every other news service I can find bears out the version of events I have offered. Here is Drum’s account of how it happened:

The backstory here is that in late November Democrats learned that unless an AMT patch was passed quickly, the IRS wouldn’t have time to reprogram its computers and lots of people would miss getting their refunds on time. So they fast tracked the patch, but Republicans in the Senate held it up unless they were allowed floor votes on some amendments that would have added additional tax cuts to the AMT tax cut. This, of course, was crazy, and the fast tracked bill failed because of it.

This is factually incorrect. They did not learn of it in “late November.” There was no last-minute rush to fix the problem, but rather negligence over a period of at least a full month. As I noted above, Treasury Secretary Hank Paulson had written Congress to warn them of this problem on October 23. The issue came up in the committee earlier than that, which was why Ways and Means Ranking Member Jim McCrery (R-La.) had originally written Paulson prior to October 23. Rangel and Reid aware for weeks that this was going to happen — probably the first conversations about this happened in early October or even September. On Nov. 6, two weeks later, Reid told reporters that there would be no AMT patch before Thanksgiving. (His exact words were: “No.”)

At some point, Reid decided that the political situation required him to put something out there, so he offered a last minute solution that raised taxes, just as Congress was on its way out the door for the Thanksgiving break. Republicans blocked it because they did not want a tax increase, as Reid knew they would. Later — after the deadline had passed — he offered a solution with no tax-hike, and it almost passed unanimously. Rangel is still blocking AMT relief. So you can decide for yourself who was responsible for letting the deadline pass — the party that could have done something about it, or the one that is in the minority and tried to stop an unnecessary tax increase.

Now, don’t get me wrong: a partisan defense of Republicans on the broader issue of the AMT would be out of line. If they’d had any guts at all, they would have repealed it ages ago. They were willing to send a repeal to President Clinton (who vetoed it), but they never sent one to President Bush — not even something like the other tax cuts, such as a reconciliation package that would expire in 2010. That could have passed without even the threat of a filibuster. But (in theory anyway) that would have meant less money for bridges to nowhere and hippie museums and prescription drug benefits and unnecessary government employees and the Iraq occupation, etc., etc.

So Republicans could have solved this problem long ago if they had done what they were elected to do in 1994, instead of “growing in office” and relying on appropriations pork to keep the Congress — which didn’t work anyway. But the Democrats are clearly responsible for missing this easy deadline to do something about AMT this year.

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