Alternative Minimum Tax Fix

In my post of 2/8/09, Less for the Same Price, I argued that the inclusion of $70 billion in the American Recovery and Reinvestment Act (ARRA, note that I misnamed the act in my previous posts) to fix the inflationary creep of the AMT was a mistake. It doesn't solve the problem for the long haul, makes the ARRA cost look larger than it actually is and then, to keep the cost down, is used as an excuse for reducing some of the needed spending on infrastructure and education improvements.

For the past several years the AMT has been fixed year by year as part of the normal budgetary process and undoubtedly would have been done so again this year. In addition, including it with the acceptance of the Republicans puts the lie to their arguments that items that should be part of the normal budgetary process should not be included in the Recovery and Reinvestment Act.

It is now 3 days since I wrote that. Until today I have neither seen nor heard anyone else mention the problem with the inclusion of the AMT patch in the stimulus plan. But this AM on C-SPAN's Morning Edition two of the guests mentioned the $70 billion AMT patch in their comments. Both Jodi Schneider, Senior Editor for Congressional Quarterly, and Martin Vaughn, reporter for Dow Jones News, stated that it is one reason why the other cuts in the plan were necessary to satisfy the Republicans.

Tonight the New York Times reported at 4:43PM that the House-Senate conference committee had reached an agreement on the contents of the bill. I quote here a paragraph from the story written by DAVID M. HERSZENHORN and CARL HULSE, Senators Announce Stimulus Agreement:

Despite intense lobbying by governors, the final deal slashed $35 billion from a proposed state fiscal stabilization fund, eliminated $16 billion in aid for school construction and sharply curtailed health care subsidies for the unemployed.

In driving down the total cost of the stimulus bill — from $838 billion approved by the Senate and $820 by the House — legislators also sharply reduced proposed tax incentives for buyers of homes and cars that held huge public appeal. Senator Collins said getting the final number to under $800 billion was more than symbolic; it meant “a fiscally responsible number,” she said.

But the final bill retained a $70 billion tax cut that would spare millions of middle-class Americans from paying the alternative minimum tax in 2009, which some Democrats decried as wasting a large chunk of the bill on something that would do little to lift the economy and that Congress would have approved regardless of the recession.

The final cost out of the House-Senate conference committee was reported as $789 Billion which is actually $719 billion not counting the AMT fix. Not nearly enough and way too much in tax cuts and not enough in infrastructure spending. If President Obama is to be successful in turning the economy around, he is way short of what it will take. The argument that he has to take what he can get may be true. However, not enough may be worse than getting nothing because we will have spent $700+ billion and end up in the same situation afterwards.

Republican Intransigence

Immediately following the passage of the Economic Recovery and Reinvestment Act (ERRA) in the US Senate the senate leaders of each party held a brief news briefing. Sen. Mitch McConnell (R-KY), Senate Minority Leader, representing the troglodyte wing of the Republican Party, attacked the ERRA on several different grounds.

One of his objections was a comparison of the proportion government spending is as a percentage of Gross Domestic Product. He argued that as a result of the spending, that percentage would rise to just under 30% from a recent average of 20%-24%. Thus he claimed that the ERRA was making our country look more like the socialist countries in Europe which he claimed run at a 40%+ rate.

What he failed to point out is that as a result of the Republican mismanagement of the economy, especially since the Ronald Reagen administration with its mantra that government spending is too large and must be reigned in by spending cuts and reduced taxes, the infrastructure of our nation has been left to deteriorate.

The American Society of Civil Engineers (ASCE) in its 2009 Report Card rates the state of our infrastructure as a "D" down from "D+" in 2005. Further they estimate that it will cost $2.2 trillion over the next 5 years to repair our infrastructure and bring us up to 21st century capability.

The ASCE figure does not include the costs to improve our nation-wide broadband deficit. Broadband Internet access is acknowledged as a major economic necessity for the future. Without that capability we will not be able to compete effectively in the global economy.

We are now ranked 22nd in the world in broadband capacity, or 15th amongst the 30 most industrialized nations. Yes, that means that 7 of the lesser industrial nations are ahead of us. One estimate is that catching up on broadband capability will require an investment of $46 billion over the next 3 years.

There are just some things that require an impetus from the government. As an example, in 1956 President Eisenhower, a conservative Republican, with the encouragement of the US automobile industry, recognized the need to upgrade our infrastructure in order to stay competitive and initiated the Interstate Highway System with federal government funding.

Rather than acknowledging this need, the troglodytes are still arguing against, not only necessary government intervention to help us recover from the deplorable state of our economy, but also against the need for government participation in providing for the common good by doing something that will not or could not be done by the free market economy without such participation.

Less for the Same Price

I remember back several years ago when a half gallon (64 Oz.) of ice cream cost $2.50 on sale and an 8 oz. (giant size) Hershey bar cost $1.00, also on sale. Today I still can buy ice cream on sale for $2.50 and a giant Hershey bar for $1.00. The difference is the ice cream now is 48 Oz. and the Hershey bar is 4.5 Oz. Funny thing is they both look like the same size as the older products. This is getting less for the same money disguised as getting the same thing.

So the economic recovery act comes out of the House of Representatives at a cost of $819 billion and comes out of the Senate at $827 billion dollars but only gives us $757 billion in value, 7.5% less for 10% more in cost.

There is one major item in the Senate bill that accomplishes this slight of hand. There are other things in the Senate bill that contribute to this phenomenon, but the one major contributor to it is the Senate provision to fix the Alternative Minimum Tax (AMT) problem which year after year now has been attempting to eat away at the middle class since the act passed, mostly due to inflation.

I say attempting to eat away at the middle class because every year the congress has taken action to forestall this by applying a temporary fix for the current year. Why has the congress not acted to put in a permanent fix? The answer is that a permanent fix would involve making the fix revenue neutral by accounting for the 10 year cost of the fix; a sum of $800 billion ($800,000,000,000) to $1 trillion ($1,000,000,000,000). The single year cost for the 2009 temporary fix is only $70 billion. Thus the permanent fix is never done, kicking the can down the road as it becomes more and more expensive to fix each year.¹

Putting the temporary one year cost of the AMT fix into the Economic Recovery Act, the $70 billion can be written off as part of the stimulus cost and not be accounted for in the annual budget to maintain revenue neutrality. But this is a cost that in the past several years has been included as part of the annual budget and should and would be included as part of the 2009 year budget if not included in the stimulus plan.

The over the top rhetoric by the Republicans about the evil of including other budgetary items in the stimulus that would normally normal have to be accounted for in the annual budget is shown for what it is; a sham just to attack the bill, the Democrats and the President.

The net result is that the $827 billion dollar cost of the Senate bill only delivers $757 billion in value. Hence, less for the same price.

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¹For a more detailed discussion of the AMT kabuki act going back to how it was used in justifying the 2001-2003 Bush tax cuts see:

Myths and Realities About the Alternative Minimum Tax

Immediate Action Needed

There are no positive words that I can apply to the current machinations of the US Congress, both the House of Representatives and the Senate. This applies to both the Democrats and the Republicans, albeit in my opinion the Republicans are more reprehensible than are the Democrats. I say this because while the Democrats loaded the American Recovery and Reinvestment Act with some partisan programs that were sure to raise the ire of the Republicans, the Republicans have used their objections to these few provisions amounting to maybe some $20 billion out of $900 billion to delay and eventually sink the entire package. And in so doing, they are attempting to damage President Obama's standing among the electorate and gain a political advantage.

Their is a real danger that our economic condition could spiral totally out of control into a prolonged recession, perhaps a depression. (While there is no standard definition of when a recession becomes a depression, SEE: Depression vs. Recession for one reasonable definition.) Many economists believe that it takes a deflationary spiral to make a recession into a depression.

A deflationary spiral comes about when the value of assets fall as well as wages and retail prices. When that happens it is difficult to stop. As values fall for assets that are being used as collateral for loans, the loan becomes unsustainable by the asset and the entire financial structure begins to unravel. This has already happened in the real estate market and is reflected in the stock market and the banking crisis. Therefor it is clear that we are either already in a depression or are very close to being in one, heading for a fall of 10%+ in the GDP.

What has been happening especially during the past 3 months, is that unemployment has been rising at an increased rate. During that period 1,655,000 jobs have been lost. That is, approximately 18,000 jobs lost per day (including Saturdays, Sundays, and Holidays.) Every day that goes by another 18,000 people and their families are finding themselves without a job, losing their health insurance and their ability to pay their rent or mortgage potentially leaving them homeless, bankrupt and hungry and adding to the surplus of unoccupied homes with the subsequent decrease in value.

The above outlines why the need for action is urgent. And the congress is busy playing politics with the future economic sustainability of our nation. Maybe they are out of touch with the hardships being endured by their constituents and the potential danger to our future. Just listen to the Republicans talk about the need to take our time to make sure that we have the right package. You can be sure that if they were living paycheck to paycheck, faced with the imminent possibility of becoming unemployed and having their home foreclosed upon, they would be more eager to compromise and come to a quick resolution instead of playing politics.

Surprise of surprises! While composing this posting Sen. Joseph Lieberman (I-CT) on the floor of the Senate is making the exact point I have made here.