Bargaining chip

In her article, Slay this Tax ‘Monster’ (thanks to Don Boudreaux on Cafe Hayek for the link), Veronique de Rugy says we should get rid of the Alternative Minimum Tax (or AMT).

The AMT is a flatter tax code that kicks in for what many consider high income folks to reduce their ability to benefit too much from tax deductions.

The problem is that the level of income where it kicks in doesn’t automatically index for inflation, so over time and with inflation more people who many would not consider to be high income will fall under AMT and end up paying higher taxes.

de Rugy claims that lawmakers do not fix the code permanently because they would need to figure out how to replace the projected loss of revenue with something else, so fixing it for short times makes that projected loss of revenue of lower magnitude.

That’s an unfortunate consequence of the nice sounding PAYGO (pay-as-you go) statute, which requires new spending or reductions in revenue to be offset by new revenue or reductions in spending.

But, I think PAYGO provides a nice cover for what is really at play here.

Lawmakers love the political value of the short-term patch.  It’s a built-in bargaining chip and fodder for campaigns.

The next time the patch expires, Democrats gain leverage on their legislation from Republicans by threatening not to vote to extend.  If they don’t vote to extend they can tell their constituents that they went after the wealthy.

Likewise, Republicans get to tell their constituents that they fought hard to extend these ‘tax cuts’.  And the music continues to play.


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