Vague talk about "closing the tax gap," or Kim's $100 billion "savings target," will not get around the new congressional paygo rules. Even if it did, that still leaves the Third Way plan with a $150 billion gap to fill, without any of the promised relief from the alternative minimum tax (AMT).
Kim suggested that "additional sources of offsets" would be found in "Sen. Kennedy's proposal to repeal tax cuts for high-income households. This proposal would save $61.1 billion over 10 years, which provides ample room for the proposals above ($250 billion) plus AMT reform (about $600 billion) and other initiatives."
Out of that $61.1 billion, Congress would have "ample room" to add $250 billion in new loopholes, fix the AMT and fund "other initiatives'? That imaginative arithmetic demonstrates what Kim meant by "ways to talk about taxes" without actually saying "some ought to be increased."
Legislators still hoping to advocate the Kerry tax increases without suffering his political oblivion are being advised to describe higher tax rates as mere "offsets" to finance new loopholes for narrow groups.
Under those redefined Kerry "offsets," the 33 percent tax rate would be increased to 36 percent and the 35 percent rate to 39.6 percent. One unintended consequence is that thousands of Subchapter S corporations and limited liability companies would promptly revert to filing their profits under the lower corporate tax, so individual tax revenues would end up smaller than otherwise.
The top tax on dividends would be raised by 164 percent under the Kerry plan, which would obviously crash the market for dividend-paying stocks. The capital gains tax would rise to 20 percent, but there would be few stock market gains left to tax.
The political fallout might be as perverse as the impact on tax revenues and stock prices. Personal exemptions and deductions would continue to be phased-out at higher incomes, under the Kerry plan, which (like the AMT) is a sneaky way to raise marginal tax rates on large families in overtaxed "blue" states such as New York, Massachusetts and California.
Even if this soak-the-rich scheme could actually raise $61.1 billion over 10 years, that would not even begin to pay for Schumer's grab bag of new loopholes, much less any durable fix for the AMT. Besides, the Congressional Budget Office (CBO) expects federal revenues from the individual income tax alone to total $17.5 trillion from 2008 to 2017. Hoping to extract an extra $6 billion a year from a few rich people cannot possibly be what really motivates so many Democrats' impulse to raise the highest, most economically destructive tax rates.
My January column "Tax Cuts and the Rich" used CBO data to show that, "for the bottom 80 percent as a group, the total federal tax fell from 14.1 percent in 2000 to 11.4 percent in 2004 -- a 19.1 percent tax cut. The tax cut was deepest among the poorest fifth (29.7 percent), largely because of the Bush administration's refundable tax credit for children. For the middle fifth, the total tax rate fell from 16.6 percent to 13.9 percent -- a 16.3 percent cut. As for the top 1 percent, their overall tax rate was merely trimmed from 33 percent to 31.1 percent -- a 5.8 percent cut."
To raise enough revenue to fund all the Third Way promises would require undoing all those Bush tax cuts -- those for the bottom 80 percent, not just the top 3 percent. "(Jim) Kessler of Third Way," notes the Los Angeles Times, "concedes that the most realistic funding source is the repeal of Bush's tax cuts."
Whenever some politician or political strategist begins offering a package of pleasant-sounding tax breaks for this group or that, be wary that the economy may be strangled by the many strings attached.