The well-off vs. the rich

December 07, 2005

America's war in Iraq has cost more than $200 billion - financed by China's purchases of Treasury bonds. Hurricane Katrina hit Washington this year with an unexpected bill of at least $100 billion. Since the budget surpluses that ended in 2001, the nation's cumulative deficits through the last fiscal year total $1.3 trillion - thanks largely to President Bush's historic tax cuts disproportionately benefiting the well-off.

So what's Congress fighting over as 2005 comes to an end? More tax cuts, most of which would go to the well-off or to the very rich. The Senate and House essentially will begin battling over which of these groups benefits the most, as the two bodies try to reconcile respective tax bills - each calling for about $60 billion in tax cuts over the next five years but by different means.

Half the Senate's proposed cuts come from a one-year fix to the alternative minimum tax (AMT), but it didn't extend the tax cuts for dividends and interest that expire in 2008. The House bill would do the opposite: It doesn't fix the AMT, but extends the tax breaks for investors. Of the two bills, the Senate's is far preferable.

More than three-quarters of the benefits of both bills would go to those making more than $100,000 a year, according to the Urban-Brookings Tax Policy Center. But the House bill heavily favors the very rich - with 40 percent of the benefits going to those making more than $1 million a year vs. just 8 percent of the Senate bill's benefits. Moreover, with the AMT projected to fall on about 19 million taxpayers next year (up from about 3.5 million this year), the Senate's temporary fix would help more taxpayers making less than $100,000 a year.

Truth be told, the nation really can't afford either tax bill. Both bills would cut revenues by more than the spending cuts now under consideration. The combined result of the spending and tax cuts would be to cut services to low- and moderate-income earners, cut taxes for the well-off, and increase the federal deficit. At the same time, the growing impact of the AMT on middle-class earners - it was originally intended to prevent the super-rich from avoiding all taxes - must be addressed, and the sooner the better. That Washington now faces such a no-win choice - a much-needed AMT fix that it really can't afford - is testimony to the outright fiscal recklessness of the Bush presidency.

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