Washington – By week’s end, Republicans in Congress will send President Bush a $69 billion package to extend low tax rates for investors and temporarily spare millions of middle-class Americans from a creeping “alternative minimum” tax.
The package, along with a pending budget plan, would worsen an already grim long- term financial outlook for the federal government.
The Bush administration says the tax cuts will spur economic growth, which will yield more tax revenues. Critics say investors and the economy don’t need the tax-reduction package and that it gives the vast majority of its benefits to the wealthy, relies on deceptive gimmicks to mask its true costs and will reduce revenues precisely when federal commitments for Social Security and Medicare benefits are set to explode.
Meanwhile, the House of Representatives is preparing to raise the federal debt limit for the fifth time in four years and the second time this spring, this time to nearly $10 trillion.
That’s almost double the $5.7 trillion gross federal debt of fiscal 2001 when President Bush took office.
The Senate hasn’t scheduled any action on the debt limit, but many economists fear a debt crisis lies ahead that could menace the U.S. economy.
“We’ve got to make some very hard choices in the not-too-distant future. I don’t think they’ll be made by President Bush, but they will have to be made by whoever is going to be the next president,” said Mark Zandi, chief economist for Moody’s economy.com, a consultancy.
The tax plan that Republican congressional leaders hammered out Tuesday night would reduce revenues to the Treasury by nearly $90 billion over five years but would add $21 billion in tax hikes, for a net loss of $69 billion.
It would extend until 2010 the 15 percent tax rate on capital gains and dividend income, first set in 2003. Previously, the rate was as high as 38.6 percent for dividends and 20 percent for capital gains.
The House of Representatives passed the measure 244-185 Wednesday. The Senate is expected to pass it today.
The bill also contains a one- year reprieve for roughly 15 million Americans who otherwise would pay the alternative-minimum tax, a parallel income tax. It was designed to close loopholes for the rich, but because its income levels don’t rise with inflation, it increasingly snares middle-income earners. The tax package would give an average tax cut of $47 to families with annual incomes between $40,000 and $50,000 – and $42,766 to families with incomes of more than $1 million a year, according to the Tax Policy Center run by the Brookings Institution and the Urban Institute, two center-left Washington research centers.
“I support a low capital-gains tax. It’s hard to argue with amending the AMT. The problem is that it’s not offset in any way. This failure to make choices is what is driving the budget deeper into the red,” said Robert Bixby, the executive director of the Concord Coalition, a bipartisan budget-watchdog group.
To reach the $69 billion tax- cut total, Congress is relying in part on a gimmick that brings in revenue temporarily but loses far more revenue in future years. It would allow holders of individual retirement accounts to pay a tax now on recent investment gains.
That would bring in an estimated $6.4 billion in tax revenues over 10 years. But investors then could take their account balances and convert them into Roth IRAs, in which the money could grow tax-free. By 2049, that will cost the Treasury an estimated $36 billion, according to the Tax Policy Center.
