10/12/2005

Daily Kos: Butter Up! Your future is about to get carved

Butter Up! Your future is about to get carved
by Stirling Newberry [Subscribe]
Wed Oct 12, 2005 at 06:50:26 AM CDT

The most important project of George Bush's second term is to make sure that the middle class and working class pay for his blunders. This is going to be one of the most crass attacks on the middle class in recent history - and it is political gold for the left, because it is going to break the current tax code, and strip millions off the health care rolls.

The LA Times warned on this last week, and now it is coming out of the wood work.

What is it? The GOP's strategy has been to abolish - not cut, change or modify, but eliminate - the taxes which fall on the privileged.

* Stirling Newberry's diary :: ::
*

Dividends were first, then came the inheritance tax. Now the next big threat is the Alternative Minimum Tax. The AMT is the hole in the 1986 tax code - it was the one provision that could have been used to, instantly, make the tax code progressive. What is the AMT? Why is it a problem for the Gop?

The Alternative Minimum Tax is, essentially, a no deductions income tax rate, one that you must pay if you make enough money, even if deductions would otherwise reduce what you more. It had the following logic: first, many deductions such as mortgage interest are open ended, this effectively capped them - second, it prevented run away manufacturing of deductions.

The AMT was put in as a way of gradually balancing the budget over decades - it was not indexed to inflation, which meant that there was "bracket creep". What is bracket creep? Bracket creep is when inflation increases your wages, but the increases in "brackets" in the tax could don't change. Americans were introduced to bracket creep in the late 1970's - wages went up, but the tax brackets did not shift. It meant that "cost of living adjustments" were being eaten up by increases in taxes owed. Americans hated it when they could see it so clearly. Bracket creep is a stealth tax - because the government is the economic player that decides how much of bad economic judgement shows up as inflation. Bracket creep is part of "the inflation tax" - the government improving its position by allowing expansion of the monetary supply in the face of inelastic demand. Or to translate from the econogeek - the government throwing gasoline on a fire.

The AMT line is not indexed for inflation, the core of the Republican base - particularly in areas such as the northeast where the party is week down the economic scale - is starting to feel the AMT - wages at the upper and upper middle class area have increased after inflation. The AMT is also a mechanism for instantly erasing the entire Bush budget looting - simply make AMT progressive with fixed brackets, and apply to capital gains, and suddenly, it isn't so good to be rolling in dough any more.

The Republicans have realized this, and that is why "AMT has got to go".

::

However, there is a problem - the AMT is bringing in a lot of money and will be bringing more and more as inflation pushes it down the income scale. This means that to pay for abolishing the AMT, even the Republicans aren't quite foolish enough to add $1.2 Trillion - which is probably on the low side since AMT slows up other deductions that the Republicans have in the pipeline, and inflation is going to increase upper bracket wages faster than expected in the rather rosy economic numbers being presented by the OMB and CBO - which now sing in rather tight harmony.

Which means someone has to pay for all of that. That someone is you.

The plan is this - the two largest deductions in the tax code are for health insurance and interest on mortgages. These two deductions are, in fact, bad ideas - the are fueling domestic economy inflation. However, removing them without a cushion for the transition is exactly the kind of behavior, which if it were directed at corporations, would raise cries of bloody murder from the Republicans - people have made long term plans based on these deductions, and the economy has been structured to feed on the vast housing and health care inflation that has been generated. Normally when removing this kind of deduction, there is some amelioration during the change over - such as lowered rates.

The Republicans, of course, intended to do no such thing, in part, because there is no money to do it with. While, over time, the price of health care and housing will adjust downward - that is to say, if you have home equity you want to draw by selling, it will be time to do so before this tax change gets passed - during the transition, before rates have actually dropped on health insurance - people will simply be dumped off the health care rolls, particularly retirees who have o economic value to companies anyway. They are just people that promises were made, and corporations make money by breaking promises.

::

The reason that this is political gold is that gutting these deductions is, in fact, economically a good idea. Housing and health care inflation - in part driven by deductability - are, in fact, ruining American competitiveness, because they encourage people to go into activities that don't export. We don't export nursing care, nor can we put houses on boats and ship them overseas.

The Republicans, by enacting them in a way that is designed to butcher the middle class to protect the upper-middle class, and the propaganda campaign to convince 200K a year power couples that they are "middle class" and even poor is already starting - is going to break the very constituency that they have relied upon to stop real overhaul of both health and housing, namely, the people who are getting subsidized gold health care, and will lose out under any national system.

With these people off the health system rolls, within 5 years there will be a huge constituency to create a national health system. With the people who were hoping to cash out of houses dumped, there will be a huge constituency for pension changes and for a return to economic growth, rather than asset inflation, as the driving engine of the US economy.

What a progressive plan would do is swap these deductions for national health care, and make the AMT more progressive. What the phants are about to do is hand the middle class to the Democratic Party. So long as they don't drop the ball.
Daily Kos: Butter Up! Your future is about to get carved

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