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  • Trading Temporary Relief for Permanent Pain

    The House is set to vote today on H.R. 6275, a bill that trades temporary relief for permanent pain. According to a Republican Study Committee report, without a patch, the AMT will impose a $61.52 billion tax bill on middle-class Americans over the next 11 years. This is a tax burden the original AMT bill never intended nor is it revenue the government should feel entitled to receive.

    Rather than being a tax relief bill, H.R. 6275 is a tax grab. Under a guise of patching the AMT (temporarily), it would permanently raise taxes and administrative costs on millions of businesses. What Congress does not seem to realize is that businesses are owned and operated by ordinary Americans. Whether a shareholder, an employee or a consumer of the goods and services produced, all are stakeholders in the performance of businesses. Rather than fixing the AMT, this bill plays with semantics and fiscal timing to get around PAYGO rules and expand government reach.

    For instance, it would change the classification of capital gains to “ordinary” income so that these rewards for taking an investment risk can be taxed at a higher rate. Since these gains are the earnings from taking an investment risk, this decreases investment incentives. Less investment means less new technology, less new capital and less growth. Similar provisions in a previous bill were analyzed by Heritage’s Bill Beach and Guinevere Nell. Table 1 of their paper shows the likely effect of these distortionary tax increases on investment, GDP, employment and personal disposable income.

    The effects of this bill would be similar. More than the monetary disincentive, though, this bill poses a large cost on the economy by increasing uncertainty about the rules of the game. It does this by sending a punitive message to business owners that their profits are subject to the government’s ex-post assessment of whether a company is worthy of its profit. This in turn depends on the political climate. H.R. 6275 does that by denying a standard corporate deduction that is allowed for all businesses to oil and gas subsidies. This political move raises the uncertainty of future investments because individuals must now decide whether Congress is going to think their profits fell from the wind if their investment proves successful. Increased uncertainty puts downward pressure on investments and limits economic growth. It also encourages more resources to be used on lobbying.

    The bill also raises administrative costs for businesses by requiring more reporting by payment transfer companies. Although closing loopholes is needed, there is a trade-off between revenues and enforcement costs. The estimated cost of this provision is $9.8 billion over 11 years (RSC report). These are real costs. More reporting for businesses means they must divert resources from productive activity to complying with government paperwork. These small micro effects may seem imperceptible and people may not realize that their job loss is a ripple effect of these regulatory burdens but these millions of small micro effects can be seen in the macro economic effects of the economy — less employment, less personal disposable income and less investment.

    H.R. 6275 provides direct tax reduction while indirectly raising taxes and costs. The bill capriciously increases taxes on those they deem it is politically correct to do so. The AMT is a provision that needs to be dealt with honestly. The longer is it “patched” with these types of bills, the more the American public will suspect that this is not so much a tax but rather a smokescreen that Congress uses each year to push a political agenda.

    Posted in Economics [slideshow_deploy]

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