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Just In Case a $700 Billion Addition to the Debt Isn’t Enough…

October 1st, 2008 . by economistmom

You know what they say, “a teaspoon of sugar helps the medicine go down.”

The Senate will take up a “sweetened” version of the financial rescue package this evening.  The “sweeteners” are intended to encourage House Republicans (who chose not to support the House version) to ultimately support the Senate version.  Trouble is, as this CNN story points out (and as Richard Rubin’s CQ article elaborates on), the Senate seems to be saying “to hell with” the House Democrats, especially the group of House Ds I am most fond of (the Blue Dogs)–emphasis added:

The revised bill contains provisions that the Senate hopes will appeal to House Republicans, who voted two-to-one against the original legislation. The sweeteners include renewable energy tax incentives - for individuals and businesses alike - that have been on the table for several months and had a chance of passing at some point anyway.

The bill also includes relief from the Alternative Minimum Tax, without which millions of Americans would have to pay the so-called “wealth tax.”

AMT relief is an annual political ritual, not because it lacks receive bipartisan support, but because deficit hawks on both sides of the aisle contend the cost of providing that relief should be paid for. Others argue it shouldn’t be paid for because the AMT was never intended to hit the people the relief provisions would protect. Nevertheless, lawmakers pass the measure every year or two.

There’s that reasoning I can’t stand:  that it’s “not right” to replace the revenue from an unfair tax with revenue from completely different (fairer) taxes.  That’s called “revenue neutral tax reform.”  Someone needs to ask those senators (both Rs and Ds) who espouse such justification for deficit-financed tax cuts:  why is it more fair to replace that revenue (from that unfair tax) with a debt burden that will ultimately be paid by our children and grandchildren?

6 Responses to “Just In Case a $700 Billion Addition to the Debt Isn’t Enough…”

  1. comment number 1 by: Jason Seligman

    AMT relief appears headed for the same political morass that Social Security benefit increases were for most of mid-20th century history. The stop gap approach was ended in that case, not because seniors were harmed by incremental erosions in the value of their benefits, but because one political party believed that the other gained unfairly when benefit increases were passed. (That and the head of Ways and Means decided to run for President.) How can it be that today’s middle class taxpayer is less fortunate that yesterday’s senior?

    It may be because AMT relief does not appear to be a clear ‘win’ for either Democrats or Republicans when it passes.

    AMT relief appears to give all members of Congress that vote for it a small stage from which to announce they care about the middle class. The question has always been why waste time on this issue which still seems mystic to many uninformed taxpayers, when that time might be better spent on other legislation–especially if we all know the AMT relief act will pass anyway?

    After the past week, that last part can no longer be taken for granted. The assumption that Congress will do what is right in a timely manner has always been tenuous. (Last year, IRS printing deadlines were a motivating factor in getting AMT legislation accomplished. Not until the turn of the year did a good number of citizens know how they were being taxed on their economic decisions and activities for the one just past.) Incremental AMT reform makes it harder for government and her citizens to plan for revenues and obligations, to budget and save. (I note that the same Congress that offers uncertainty on the AMT offers an arcane spectrum of changing tax credits and bucket-saving schemes to motivate better choices regarding medical care and retirement saving.)

    But these past few weeks folly has worked against Congress’ credibility. The tax payer and the foreign financier alike now notice that Congress does not seem to understand some very fundamental things about fiscal governance and in particular the dynamics of a credit crises. (Just add credit.) Without liquidity in markets, State and Local government (the source of he majorityof US savings) too are noticing that municipal finance is getting more difficult. Infrastructure investment in roads, hospitals, and schools depend on liquid markets. These public works in turn contribute to productivity. And so we now can earnestly ask, “will AMT reform pass this next time, or will it be seen as politically expedient to effectively pass an unexpected tax increase on the middle class this year by doing nothing?”

    Congress should develop the capacity for leadership in many areas that are meaningful for Wall Street, and for my street. Bailout theater, AMT theater, and the like are more than a distasteful distraction. Each is an exercise perpetuating less competent response to the next legislative challenge. Congress should spend it’s time and thereby our money more wisely.

  2. comment number 2 by: eveblen

    Jason’s idea that “Congress should develop the capacity for leadership” is a necessary (though not sufficient) condition for avoiding debt Armageddon in coming decades…

  3. comment number 3 by: Bryant Arms

    I wouldn’t be surprised if the recent overhaul of bankruptcy legislation was designed for this economic situation; it turns human debtors into indentured servants. And that is necessary for the following reason:

    The ’sssssss’ we are noticing with this credit crunch is just the leak before the big burst. This credit bubble has been inflated by a logorithmic base 10 scale of dollar creation.
    The practice of using 90% of ‘real’ wealth for lending that can then be invested and re-deposited for recycling again and again for more and more credit probably has the same effect of simply printing more money. The difference between those two ways of creating wealth is that creating money by credit inflation redistributes wealth for the benefit of financiers. And printed money is real; not fake.

    This credit bubble burst should, then, be creating a shortage of money. And the cure may be as simple as the government printing more money. The only problem with that scheme is that there would not be another bubble to burst to correct for over-inflation. Printed dollars don’t evaporate away like the ones the financiers are trying to sell taxpayers now.

    And that is why those who have engineered this bubble need those new draconian bankruptcy laws. Only wage earners can turn this fake money into real wealth. And that is why the Bush administration and other supporters of the great bailout plan are adamantly against giving bankruptcy judges the right to restructure debt according to who is most responsible for making bad loans.

    Bryant Arms

  4. comment number 4 by: Jason

    “Bush administration and other supporters of the great bailout plan are adamantly against giving bankruptcy judges the right to restructure debt according to who is most responsible for making bad loans”

    Who took out those loans? Didn’t they read their mortgage documents? Didn’t they read their credit card agreements? No one held a gun to their head and said “Borrow this money”. People are responsible for the choices they make.

  5. comment number 5 by: Jim Glass

    There’s that reasoning I can’t stand: that it’s “not right” to replace the revenue from an unfair tax with revenue from completely different (fairer) taxes.

    The argument is not that it is an “unfair” tax but that it was an “unintended” tax — as in the bold text you quote: “never intended to hit the people the relief provisions would protect.”

    If I mean to tax you, but do so with an unfair tax, then changing the tax to a fair one on you is a good thing.

    OTOH, if I say I never intended to impose a tax, but accidentally did so, then the honest thing for me to do is repeal the tax to restore the situation I say I intended, and to take the budgetary consequences from there.

    However, if I say I never intended to impose a tax, but oopsie entirely accidentally I did at an annually increasing rate, so now my only choice is to turn that accidental tax into a permanent tax, well, that’s just a disingenuous left-handed ploy to increase taxes without taking responsibility for it, if ever there was one. “An accident of fate forces this tax increase.”

    The whole issue with the AMT is Congress’s entirely typical behavior in hiding the taxes it collects (”Don’t tax you and don’t tax me, we’ll tax the fellow behind the tree!”) and ducking responsibility for its actions. Every single member of Congress you ask will tell you that he or she never never intended the AMT to hit the working middle classes. It’s just an accident!

    But it’s now been a 40-year creeping accident. And it’s kind of hard to call something Congress has been doing for 40 years an accident. Even while that’s what any Congressman will tell you every time, fate somehow forced the AMT upon them.

    If the AMT is either unfair or an accident or both, the fix for it is very simple: Congress should repeal the whole dang thing — not just the annual increment — and then take responsibility for either (a) making up the whole amount of lost revenue with a straight increase in the rates of the regular income tax, or (b) adding the lost revenue to the deficit. Either or. Clear and simple.

    But “clear and simple” is exactly why Congress won’t do it — it doesn’t want to be clearly responisble for anything. It wants the revenue but doesn’t want to be seen visibly raising any tax rate at all.

    Thus for decades it has much preferred this extremely opaque tax exactly because the marginal taxpayer who is likely to pay it doesn’t know it and can’t compute the tax in advance — last year’s 2007 AMT rules weren’t even enacted until December! — and so doesn’t object.

    And because it produces more AMT revenue every year without any Congressman ever going on the voting record to raise a tax rate — the tax just “increases itself”! In fact, Congresspeople get to be heros every year by going on record to reduce the tax increase! Politically, what could be better? If you’re a Congressman that sure beats the heck out of voting for a big increase in either the regular income tax or the deficit!

    Killing the AMT and adding the revenue it collected to either the regular income tax or the deficit is just too dang obvious — the criticism Congress received would be ferocious either way.

    And Congress always chooses the path of least criticism. Sound fiscal policy has nothing to do with it. (See: “$40 trillion of unfunded entitlement liabilities”). It changes policy only when fiscal irresponsibility finally produces such unhappy consequences as to generate even greater criticism of it, and thus a “crisis”. (See Social Security Insolvency of 1983).

    The is just the politics of democracy. It’s universal, and a mistake to consider it all a “failing of Congress”. It’s why the US’s richest state, California, is now out of cash, unable to borrow in the markets, and asking the Feds for a $7 billion emergency loan to cover its budget. It’s why S&P projects that by 2030 on current law France, Germany the UK and Japan, as well as the US, will all have their soverign bonds reduced to “junk” status — and not one of them is doing a dang thing about it. They’re all waiting for the crisis to arrive before they do.

    Basically, it’s a universal failing in democratic states of us, the voters. We want legislators who will deceive us about fiscal responsibility, be irresponsible and give us something for nothing in the short run, not worrying about the long run — so we elect ones who will, and they do.

    And being that the electoral evidence is very clear that we’d vote legislators who tell us the hard truths (”You just can’t have the Medicare and Social Security we’ve promised you at the tax rates we’ve promised you!”) out in about one minute, you can’t blame the politicians we elect for acting this way.

    The problem is us. We’re just going to have to find a way to live with ourselves.

  6. comment number 6 by: Jim Glass

    Congress should develop the capacity for leadership

    It’s a nice thought, but after 200 years I am not optimistic. Here’s how Norm Schieber described Monday’s vote…

    My sense of what happened is this: There were a healthy majority of congressmen who wanted the bill to pass, but many of them (most of them?) also wanted to be on record voting against it, for obvious political reasons.

    So you got a classic prisoners’ dilemma situation: Everyone’s best-case scenario was to vote against the bill and have everyone else vote for it. Unfortunately, as anyone who’s taken introductory micro knows, that usually leads to the worst-case scenario, where everyone defects and the whole venture collapses.

    That wasn’t mere theorizing. To quote Representative Paul Ryan (R-WI), in the NY Times…

    “We’re all worried about losing our jobs. Most of us say, ‘I want this thing to pass, but I want you to vote for it — not me.’ ”

    So I think we can safely say there were scores of Congresspeople who believed that the bill was in the national interest but voted against it nonetheless to further their own personal interests next month.

    Whatever that is, that’s not “leadership”.

    And the way they were rewarded with the “PorkPlus” version of the bill that was passed yesterday, what’s that do but reinforce this behavior in the future? The greater the national interest at stake, the more reward there is in being an undecided vote with one’s hand out waiting to be convinced.

    Some may still believe in the “profiles in courage” model of representative government they teach in junior high … that we elect responsible representatives to act on our behalf who sit, collect the facts, ponder, and then vote for what they believe to be the best policy for the nation. Well, if so, fuhgetaboutit.

    Congress isn’t structured, it’s members don’t have the incentives, to provide leadership. Not since its earliest days when it refused to pay the troops who won the Revolutionary war and Gen Washington had to personally intervene to stop the army from marching on Philadelphia.

    The great strength of Congress is that it represents the people in a way rarely seen before the US Constitution.

    The weakness of Congress is that its individual members are every bit as self-interested as any Wall St banker or CEO — and they get ahead by representing people who are largely ignorant, biased, and have opinions readily subject to manipulation. Thus we see the events of last week (in which the auto industry also got a $25 billion bailout bipartisanly passed to practically a standing ovation as “an investment in American jobs”). It’s just not a formula for institutional leadership.

    Leadership has to come from the executive. It’s too bad these days we don’t have one.