Stupid Tax Tricks

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The shell game gets ridiculous in its treatment of corporate taxes. One provision delays the collection of $33 billion of estimated corporate taxes from Sept. 15 to Oct. 1 this year. Why? By pushing the collection into the next fiscal year, the bill makes this year's immediate relief look larger. "Republicans had to make sure it looked less dangerous by packing it with every kind of gimmick and sleight of hand I have ever seen," fumes Rangel.

The tax bill isn't all bad. Beginning in 2002, it introduces a generous college-tuition deduction that increases up to $4,000 a year. But that lasts only through 2005. The bill expands the education ira to an annual contribution limit of $2,000, up from just $500, and for the first time permits that money to be put toward private elementary, middle and high school costs. Some see that as a stealth move toward a voucher system because it helps more families afford private school and thus undermines public education.

In another give-and-take break, the bill addresses the marriage penalty but then makes the fix disappear. Lawmakers have long lamented that some married couples pay more tax than they would if they filed as singles. The problem is that the standard deduction for married people is less than twice the standard deduction for singles. And for married couples, income thresholds for higher tax brackets are less than twice the level for singles. The tax bill raises the standard deduction between 2005 and 2009. But the new schedule dissolves at the end of 2010.

Finally, there is the most bizarre levy of all, the alternative minimum tax, or AMT. It's supposed to hit just the rich by forcing taxpayers with substantial deductions to compute their taxes twice--once the normal way and then at a lower rate but without many of the deductions. They pay whichever calculation costs them more.

Because the AMT, which now affects some taxpayers making less than $100,000 a year, is not indexed to the inflation rate, it is creeping up on many middle-income taxpayers. This year 1.4 million paid the tax. That number is expected to reach 5.6 million in 2004 and more than 35 million in 2011. And there's the rub. The law provides $2,000 to $4,000 in AMT relief this year but drops the relief in 2005. So when the crunch really hits, the AMT will steal whatever tax relief many Americans think they're getting.

The hope on both sides is that when future lawmakers evaluate the nation's finances, they will find that surpluses have grown and be able to make all these tax reductions permanent. That hope looks a bit futile in the face of the new, more pessimistic surplus projections that are expected later this month.

Bush and the Republican leadership think the numbers will work out--and some economists agree. These optimists believe the stimulative effect of lower taxes "will strengthen the economy and increase the projected budget surplus by generating larger tax revenues," in the words of Mark Weinberger, Assistant Secretary of the Treasury for tax policy and the government's top tax expert. Plenty of people dismiss that as classic supply-side dogma. But Weinberger notes that tax revenue increased after Ronald Reagan's tax cuts took full effect in the mid-1980s. The Reagan deficits, he argues, resulted from his military buildup and other spending, not the tax cuts.

It's too late to turn back now. The machinery is in place to begin mailing a rebate check of $300 to $600 to nearly every taxpayer by the end of September. Each filer should get a letter in July stating the amount of the rebate. All told, the rebates will inject $40 billion into the economy. Many economists believe that may be enough to hold off a recession. "A lot of the analysis simply does not take into account the fact that the tax cut will promote economic growth and changes in consumer behavior," Weinberger asserts. "It's difficult to quantify. But the changes will be positive." Let's hope so. To pay for all these tax cuts and make them permanent, the country is going to need plenty of growth.