Class Warfare With Taxes

Tax bills now wending their way through the House and Senate would cut about $60 billion in taxes next year. But there's a huge difference between the two. The biggest item in House bill is a two-year extension of the president's tax cuts on stock dividends and capital gains. The House bill doesn't touch what's called the Alternative Minimum Tax (AMT). By contrast, the biggest item in Senate bill is temporary relief from the AMT. But the Senate bill doesn't extend the dividend and capital gains tax cuts.

No legislative choice in recent years has so clearly pitted the super-rich against the suburban middle class. Most of benefits of the House's proposed extension of the dividend and capital gains tax cuts would go to the top one percent of taxpayers, with average annual incomes of more than $1 million. Most of the benefits of the Senate's cut in the AMT would go to households earning between $75,000 and $100,000 a year, who would otherwise get slammed.

The AMT was enacted more than three decades ago to prevent the super-rich from using tax breaks to avoid paying income taxes. But it's now the super-rich who are making off like bandits, while the AMT is about to hit the middle class. That's because the AMT was never indexed to inflation, which means it's starting to reach taxpayers considerably below the super-rich.

This year, the AMT will affect more than three million middle-class taxpayers who will no longer be able to deduct state and local taxes or use the child tax credit. Next year, if not adjusted, it will affect ten million more taxpayers. So unless the Senate version of the new tax bill prevails, middle-class taxes will rise -- even as the Bush tax cuts of 2001 and 2003 continue to reduce taxes on the very wealthy.

Here's where things get politically interesting. Both groups -- the super-rich and the upper middle class -- have lots of political clout in Washington, especially in Republican circles. So as these two tax bills move on a collision course, the multi-billion dollar question is: Which group will win?

The likely answer: Both! Here's betting the Senate and House will compromise by extending the dividend and capital gains tax cuts and cutting the AMT. It's an elegant compromise, of the sort Washington is skilled at making. There's only one problem. With it, the budget deficit will explode even more.

The underlying question is, who ends up paying for Iraq, the Katrina cleanup, the Medicare drug benefit, homeland security, everything else? If the House has its way, it won't be the super-rich, who will get their capital gains and dividend tax cuts extended. If the Senate gets its way, it won't be the middle class, who would otherwise be hit by the AMT. If the House and Senate compromise by giving both groups what they want, there's only one group left.

That group is the poor and near-poor. Cut more taxes on the super-rich and the middle class, and the only way Congress can say it's grappling with the soaring budget deficit is to cut more programs for the poor. That means fewer food stamps, less Medicaid and vanishing housing assistance.

Of course, this won't be nearly enough to shrink the deficit. So in order to extend the tax breaks for the rich and to avoid the AMT, America will have to rely even more on foreigners -- from whom we're already borrowing more than $2 billion a day.

In the end, it will be our kids and grandchildren who get the tab, because they'll have to pay foreigners back. And our current political leaders? They couldn't care less -- because by then, they'll be long gone.