President Disciplines Congress on AMT

Just 34 more days are left in the year, and Congress has yet to decide Americans’ tax bills for 2007. Yet this week Congress is missing in action.Americans make better decisions if they know how much taxes they owe. But 300 million Americans — some now deceased with estates waiting to pay taxes — have made decisions for 331 days this year based on sketchy ideas about governing tax law. Simple common sense would suggest that tax law should be purely prospective, but on Capitol Hill, the 2007 taxes are subject to tinkering up through December 31 — and beyond.As many as 25 million American households, up from just a few million last year, will be caught by the alternative minimum tax, a horrific levy originally intended just for the super wealthy.Rather than taking the obvious step of eliminating the AMT, each year Congress fixes the AMT with a one-year “patch,” recalibrating the tax so that it applies only to a few million households. The AMT is rather like Frankenstein: Unless carefully tuned, it automatically turns into a monster capable of terrifying tens of millions of families.This year, despite promises from the Senate majority leader, Harry Reid of Nevada, and the speaker of the House, Nancy Pelosi of California, Congress has failed to patch the AMT. Consequently, most Americans are blissfully unaware that, by law, their taxes have gone up substantially this year.In early November, the House proposed a solution, H.R. 3996, which temporarily eliminates the AMT by creating a new permanent tax increase on offshore deferred compensation and carried-interest capital gains for general partners in investment partnerships. If this bill becomes law, the hedge funds, real estate companies, and other industries that make up so much of New York’s financial activity would simply move to where economic activity and wealth creation are welcome. New York and America would be all the poorer. And the AMT would still return in a few years.Moreover, to bridge the shortfall in tax revenues from financial activity gone overseas, Congress would likely pass even higher taxes on the rest of us.The Senate may pass a more sensible bill than H.R. 3996, but time is running short. Congress does not return until next week. If the Senate adopts language different from H.R. 3996, differences will have to be worked out in a conference with the House. While most observers believe that there is a good chance that Congress will pass an AMT patch in December, this is the same Congress that has yet to pass 12 of 13 spending bills for the fiscal year that began eight weeks ago.For an AMT patch to become law, the president must sign it. No doubt he would, but he has promised not to raise taxes, and Congress appears intent on sending him replacement taxes that are even worse. This sets the stage for a battle when and if Congress gets around to passing legislation. So it is hard to find comfort in the prospects for an AMT patch.The lateness in the year in rewriting tax laws causes logistical problems. If the patch is not passed, millions of households will suddenly have higher tax liabilities than in 2006. If the patch is passed into law, final tax rules and guidance will not be available for weeks into 2008. Tax refunds for millions of Americans will be delayed.Fiscal irresponsibility by Congress is taken for granted. Few members of Congress even recognize the problem. One exception is Rep. Paul Ryan, a Republican of Wisconsin. In early October, he introduced a bill abolishing the AMT and letting individual taxpayers choose whether to remain under the current tax system or to switch to a simplified tax system. It was such an elegant solution that a Republican presidential candidate and former Tennessee senator, Fred Thompson, unveiled a similar plan last weekend.Alas, neither a president nor an unusually responsible member of Congress can pass a new tax law. But a president could help discipline Congress when its leaders dare not. A president could simply declare that certain types of bills would necessarily be vetoed, such as taxes that take effect after a tax year has begun, or spending bills passed after a fiscal year has begun. A president with a sense of timeliness might provide some much-needed backbone to congressional leaders who, given an opportunity, will delay anything.A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He is organizing a seminar series at the Hudson Institute. He can be reached at hfr@furchtgott-roth.com.

President Disciplines Congress on AMT

President Disciplines Congress on AMT

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