The latest round of Bush tax cuts appears to be a done deal. On Tuesday, a conference committee agreed on a tax plan that will reduce taxes by $70 billion over the next five years. The plan includes a raft of new giveaways for wealthy Americans and corporations, but offers only a temporary fix for what has become a permanent problem: the expansion of the individual Alternative Minimum Tax (AMT).
Not surprisingly, the plan offers peanuts to low- and middle-income Americans while giving away the candy store to a handful of the wealthiest taxpayers. CTJ has already published distributional analyses on both of the plan's major components: for the AMT, click here. For capital gains, click here.
What's In the Conference Committee Plan
The agreed-upon tax bill includes $70 billion in tax cuts over the next five years.
The biggest single tax cut in the bill is a one-year extension of previously enacted cuts in the individual AMT. Congress had earlier enacted a temporary increase in the AMT exemption to help ensure that only wealthier Americans would be subject to the tax, but that higher exemption expired at the end of 2005. The bill extends, and slightly increases, the higher exemptions for tax year 2006 only. The one-year extension carries a price tag of almost $34 billion.
The bill also provides a two-year extension of temporary tax breaks for capital gains and dividends. 2003 legislation lowered the top tax rate on capital gains and dividends to 15 percent for five years; these temporary cuts had been scheduled to expired on January 1, 2009. The two-year extension is estimated to cost $21 billion over the next five years.
The third-most-expensive part of the newest tax cut is an expanded tax break for businesses investing in new equipment. The new law allows companies to immediately write off up to $100,000 of the cost of new equipment. The five-year cost of this new tax break: $7.3 billion.
The new law also provides a corporate tax break, worth almost $5 billion over the next five years, to companies such as General Electric and Citigroup by allowing them avoid paying taxes on certain income shifted overseas.
What's Not In the Conference Committee Plan
The Alternative Minimum Tax remains a major concern for Congressional tax writers even after the passage of this latest tax cut: as the chart at right shows, the agreed-upon higher exemption will expire at the end of 2006. CTJ has estimated that if the exemption is allowed to fall back to its currently-scheduled levels in 2007, more than 15 million Americans will be forced to pay the AMT for the first time.
The main reason for Congress' reluctance to provide more than a one-year patch for what has become a permanent problem? Its cost. House and Senate negotiators could agree on "only" a $70 billion tax cut over five years--and even a two-year extension of Alternative Minimum Tax relief would eat up most, if not all, of that amount.
Of course, every member of Congress knows the AMT is a problem they must solve by next year. The exclusion of AMT relief amounts to Congress trying to fit two pounds of sugar in a one-pound bag.
The agreed-upon tax bill is also notable for its exclusion of a variety of "extenders"--temporary tax cuts, mostly for businesses, that have expired or are about to expire. These tax cuts are widely supported among Congressional tax writers--and will likely cost at least $20 billion over five years.
Not a Tax Cut-- a Tax Shift
A casual observer of this tax-cutting frenzy would be forgiving for not remembering that the nation already faces a $300 billion budget deficit for this year alone. Of course, this means that every penny of the latest tax cut is being paid for with borrowed money.
This money may ultimately come out of the hides of state governments, in the form of reduced federal assistance to the states; it may be paid by higher taxes on lower- and middle-income Americans. It may come out of your currently Social Security benefits. (Sorry, baby boomers!) Or the bill may just be sent straight to your grandchildren.
But however it's paid for, what Americans need to recognize is that right now no one is picking up the bill. Which means this isn't a tax cut at all-- it's a $70 billion tax shift.
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