Congress currently is considering the Federal budget for Fiscal Year 2009, which begins October 1, 2008. There are many problems with the proposed budget in both Houses of Congress, but one stands out more than the others. The Democratic Leadership of the House of Representatives has proposed offsetting the Federal Government's loss of revenue created by the one-year patch of the Alternative Minimum Tax (AMT) by raising taxes in other areas. This should come as no surprise but it could have serious repercussions for the economy and for middle-class families already struggling to pay their bills and their taxes.
Chairman John Spratt (D-SC) of the House Budget Committee recently suggested that the House Ways and Means Committee, which generally oversees tax issues, replace the lost revenues by increasing taxes on investment managers on Wall Street, according to THE HILL newspaper. Democrats tried to pass similar legislation last year but were unable to do so because they failed to secure the necessary votes to override a filibuster in the Senate. This year tactics have changed. Instead of trying to pass separate legislation to increase taxes, the House Leadership would like to push it through as part of the budget reconciliation between the House and Senate, which would only require a majority, not a super-majority. If President George W. Bush were to veto the tax increase House Leadership could claim that in an election year, when the economy is limping towards recession, President Bush was trying to protect the wealthy at the expense of the middle class.
There is a problem with this argument. Long gone are the days when the stock market was a rich-men only club. Today, many investors are middle-class men and women who are relying upon their market investments to cover the costs of retirement. Many have become quite wealthy through their own fiscal discipline and smart investments. And the younger generation, those 20 and 30-something professionals just starting their careers, hope to follow in the footsteps of middle-class investors. This is one of the reasons why the stock market has reached successive new highs over the past twenty years. In other words, a large tax increase on investment managers would hurt the middle class and young investors as much as it would the rich. In fact, it would hurt them more because they do not have the resources the rich have to pay increased fees for investing.
Senate Democrats have not yet indicated whether they will cooperate with the House or attempt to find other increased revenue streams through new taxes. They should not. The economy already is suffering and more taxes, no matter whom they are intended to affect, will create further economic stagnation. Politicians need to understand that American society is not rigidly divided into classes with no mobility among social groups. Instead, taxes directed against "the rich" often affect the middle class, which in turn hurts the working class whose employers are suffering from the increased burden. Taxes are not a zero-sum game. Such a misunderstanding is why we are having a problem with the AMT right now and why we do not need increased taxes on "the rich."
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