Feeling Taxed? Tax Changes on Congress’ Mind

One of government’s main responsibilities and challenges is to create a tax system which is both fair to those being taxed (all of us), and beneficial to the overall economy. How to achieve this is the subject of much debate and one of the main philosophical differences between the parties.

One major sticking point is that there is no general consensus as to which basic philosophies or priorities should guide tax policy -- or even on how taxes can be best used to bolster the national economy. As a result, many argue that our tax system has been haphazardly patched together and is long overdue for a major overhaul.

Pressing Tax Issue Highlights Party Priorities

Traditionally, Democrats have argued that the upper class should carry the heaviest tax burden and “social” programs such as health care and education should be a spending priority. Republicans argue that this amounts to an unfair redistribution of wealth, and say that high taxes for the wealthy and corporations stifle the economy, because these are the sources of new investment in new ideas which create new jobs.

The big tax debate has been reignited by a pressing issue: Congress needs to pass a quick-fix for the Alternative Minimum Tax, or else millions of middle-class Americans could get stuck paying taxes that weren’t meant for them. Legislators are expected to patch the Alternative Minimum Tax (AMT) and are likely to start arguing broader tax questions in the process.

The Alternative Minimum Tax

In 2005, about 4 million people paid extra taxes on their 2004 tax returns because of the AMT.

The legislation would "patch" the AMT by pushing the gross income limit up to $200,000. The patch is a temporary fix until Congress launches a full-scale AMT reform. If Congress does not pass the patch, millions of Americans could be affected on their 2007 tax returns.

Both parties would like to repeal the AMT for good, but doing so would cost the government more than $800 billion over a decade - money that is built into government budget forecasts.

Click here to read about the history of the AMT.

Election Strategy & the Politics of Taxation

Democrats are using the AMT issue to set the stage for their broader tax bill, to be introduced by Charles B. Rangel (D-New York). Rangel’s tax package also includes expanded benefits for middle-income taxpayers, higher income taxes for the wealthy, a corporate tax rate cut, and an array of tax-raising provisions to make the entire package revenue-neutral.

Ideally, the Democrats don’t want to create any major tax changes until 2009 -- after the elections that they hope will result in a larger majority.

While everyone agrees that a temporary AMT band aid is needed (no one wants to be caught taxing the middle-class because of a system glitch right before the elections), most Republicans have taken issue with Rangel’s larger tax reform.

They say that his reforms amount to a $1.3 trillion tax “increase” that will hurt the economy. Part of their motivation is strategic: Republicans are fighting for the Congressional seats they lost in the last election. Rangel argues that 90 million people are going to get a tax cut and only the wealthy will experience an increase by losing a Bush tax advantage. 

Rangel’s plan would lower taxes for the majority of Americans because it would shift the tax burden away from the middle class. Like any economic shift, the change would create winners and losers – and stakeholders have a strong incentive to influence the policy process.

How would Rangel’s bill affect me?

If you’re middle class, the standard deduction would increase by $850 for married couples and $425 for individuals, meaning that the federal government would not require taxes to be paid on those dollars. While the government does not have an official definition of “middle class,” one commonly used point of reference is the median household income, which was $46,326 in 2005.

Especially vulnerable are people with income over $100,000 and some large deductions, like taxpayers with several children, interest deductions from second mortgages, capital gains, high state and local taxes, and incentive stock options.

Click here for a list of red flags that could mean that you’re responsible for paying the AMT

However, high-income earners would face a new surtax, essentially replacing the Alternative Minimum Tax.

The reforms would also affect how businesses are taxed. Small businesses would benefit, but corporations will get taxed more, $400 billion more. Republicans argue that this would slow growth and hurt the economy.

What do you think?

What kind of tax reform would you like to see? Do you think what you’re paying now is fair?

Let your representatives know what you think!

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Article Posted on: 11/05/06