S-CHIP Expansion and AMT Elimination

That House Democrats failed yesterday to attract enough Republican support to override the President's veto of S-Chip expansion - despite altering the legislation to satisfy the President's stated concern for putting the poorest children first and capping S-Chip eligibility at 300 percent of the federal poverty level - only underscores the obvious - electing a Democrat in 2008 will be absolutely critical to achieving comprehensive health care reform. A Democrat in the White House alone won't do it, but without it one you can pretty much kiss the chance good-bye.

Beyond being impressed at the President's ability to kill S-Chip expansion, the combination of yesterday's House vote with the beginning of Republican attacks on Charlie Rangel's proposed tax reforms - including elimination of the Alternative Minimum Tax - made for an interesting juxtaposition. I find it hard to take seriously Republicans' concern for stopping the middle-class from cheating the poor on the spending side. when they have done so little to keep the rich from cheating the middle-class on the tax side. Let me explain.

On the one hand, you have Republicans accusing Democrats of distorting S-Chip - a program intended to help poor children obtain health insurance - into a vehicle of middle-class largess. This was the source of complaints about New Jersey extending eligibility to beyond 300 percent of the poverty level (to $72,000 for a family of four, hardly a princely sum in Garden State), about the alleged impropriety of allowing adults to enroll in the program (even though this is often the best way to get children covered, and the reform bill forced states to drop S-Chip coverage of childless adults), and most pointedly in the battles over Graeme Frost. Basically, Republicans object that middle-class Americans are piggybacking onto a program intended for the poor.

Interestingly, even the most vehemently anti-tax Republicans have voiced little objection to the expanding reach of the Alternative Minimum Tax, which presents a case of a tax targeted at the rich increasingly ensnaring the middle-class. In 1969 Congress adopted the AMT as a backstop that would prevent rich citizens from taking so many deductions and exemptions ("tax preferences) that they effectively had no taxable income. The initial AMT law specified certain tax breaks used mainly by the rich (e.g. the capital gains payments and the oil depletion allowance), and stipulated that use of these tax breaks on income beyond $30,000 (about $150,000 in 2003) would trigger a tax of 10 percent on each dollar deducted. Unsuccessful in even its original intent, over the years both Republicans and Democrats have unwisely expanded the list of "tax preferences" to include deductions used by taxpayers of all incomes - including the standard deduction, child deduction, and medical expenses deductions.

The upshot is that, in the words of the Urban Institute's Len Burman, "what was a class tax is a becoming a mass tax." Or as David Cay Johnston says, the AMT is the "stealth tax." By 2010 about 85 percent of all taxpayers with two or more children will be forced off off the regular income tax and onto the AMT. In other words, the share of taxes paid by middle-class people - especially those with children - will explode due to misapplication of a law initially targeted at the wealthy. In the six years they controlled both houses of Congress and the White House, Republicans slashed tax rates on many things - income (especially for the wealthy), capital gains, dividends. Yet no effort to reform the AMT. Here comes Rangel proposing to eliminate the AMT, and the immediate conservative response is a predictable "biggest tax increase in history." If Republicans are so concerned with keeping class-based policies toward their original intent (as they claim to be with S-Chip), why so little advocacy of AMT reform? It looks frighteningly as is Republicans only care about cutting taxes that harm and the rich and very rich, while employing any arguments necessary to torpedo programs that aid the poor.

The AMT is a complicated issue, and I fear I have done a poor job in explaining it. I urge anyone seeking in-depth explanation to consult chapter seven of David Cay Johnston's Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich - and Cheat Everybody Else. What I am getting at here is the basic injustice of crying foul when the middle-class allegedly exploit a program for the poor, but remaining silent when taxes aimed at the rich end up punishing the middle-class. National attention should focus on this incongruity.

Lastly, Johnston's book makes clear that the AMT really is one issue where middle-class Americans are getting a raw deal. The economic welfare of middle-income families over the next decade will suffer far more as a result of AMT creep than it will as a result of illegal immigration. Anyone mind telling that to Lou Dobbs? Actually, given Dobbs' failure to understand even basic economics, best not confuse him with this.