In his weekly radio address yesterday, President Bush promised to veto legislation that was passed by the House to temporarily fix the Alternative Minimum Tax (AMT) without driving up the deficit. Said the President, "I will veto any bill that raises taxes as a condition of fixing the AMT. Members of Congress must put political theater behind them, fix the AMT, and protect America's middle class from an unfair tax hike."
Sadly, it looks like Sen. Majority Leader Reid is likely to go along.
The AMT was originally designed to keep high-income households from avoiding taxes. A problem with the tax, however, is that it was never indexed for inflation, the way that other parts of the tax code are. As a result of price inflation over time, more and more households have found themselves potentially subject to the AMT. Congress has enacted a series of temporary patches. Without a similar fix this year, some 25 million households could be affected by the AMT.
The government should raise the AMT threshold and more generally find a permanent solution to the AMT problem. However, given our enormous deficit and the need to finance the wars in Afghanistan and Iraq, it would be irresponsible to do this without replacing the $50 billion in revenue that the AMT would have brought it. The House plan fixes the AMT, extends several other tax breaks, but also closes a loophole that allows hedge fund and other investment managers to treat their earnings as lower-taxed capital gains.
The President, who has already proposed a budget with a gaping deficit and then returned to Congress to ask for $46 billion more in supplemental war funding, is essentially asking for an additional $50 billion tax cut. Earlier this week the President vetoed another revenue-neutral bill, urging "Congress to send [him] a fiscally responsible bill that sets priorities."
The House legislation is fiscally responsible. We cannot afford to go $50 billion farther into the hole to provide yet another upper-income tax cut. The AMT patch should be balanced by other revenue increases.