We’ve written in this space before about how Senate Democrats are preparing a 2008 budget that will require massive tax hikes to satisfy their “pay-as-you-go” budgeting rule. That rule requires a matching revenue source for any proposed increase in federal spending.
It turns out House Democrats are wrestling with the same problem, as they contemplate changes in the Alternative Minimum Tax to exempt middle class families and individual taxpayers from the odious levy. Doing so produces a revenue gap of as much as $650 billion over a 10-year period, depending upon how extensive are the AMT changes. Presently, Democrats reportedly are looking at exempting folks with incomes below about $250,000.
But raising tax rates to make up for changes in the AMT introduces more distortions into an economy that already has to cope with a tax code that long ago became ridiculously complex and burdensome. One of the hikes House Democrats are looking at is raising the top AMT bracket to 31.5 percent from its present 28 percent. Supporters of the hikes will engage in subtle — or not so subtle — class warfare, appealing to those lower on the socio-economic ladder that the “rich” can handle the increases.
But what that tactic will fail to point out is the fact that higher tax rates often don’t produce more revenue for the government. In fact, the opposite is usually the case, as is dramatically illustrated by capital gains tax rates since the Steiger amendment ignited the supply side revolution in 1978: Revenues went up as rates went down. Even so, Democratic tax writers are also preparing to hike capital gains levies for upper income taxpayers snared by the AMT.
That leaves individual income tax rates, which likely will have to be raised much more than House Democrats want to admit for top taxpayers. Remember the confiscatory tax rates and stagflation (high interest and inflation rates) of the 1970s?
Sugar-coat their proposals as they certainly will, a return to the days of leisure suits, disco and economic decline is what House Democrats will give us if they join their Senate colleagues in massively raising Americans’ federal taxes.