SYNOPSIS: The strange Momma-killing incentives of the 2001 tax cut.
There's a scene in the 1966 British comedy "The Wrong Box" in which the son of an irascible plutocrat pushes his father's wheelchair along the top of a cliff, responding with a dutiful "Yes, father" to each outpouring of verbal abuse. Then the old man waves his hand at the industrial landscape below, and declares, "When I'm gone, all this will be yours." "Yes, father," replies the son — and pushes him off the cliff.
That scene came back to me as I delved further into the absurd piece of tax legislation that a House-Senate conference devised and that George W. Bush triumphantly signed last weekend. The Bush tax plan was always peculiar: in order to hide the true budget impact, its authors delayed many of the biggest tax cuts until late into the 10-year planning period; repeal of the estate tax, in particular, was put off to 2010. But even that left the books insufficiently cooked, so last week the conferees added a "sunset" clause, officially causing the whole bill to expire, and tax rates to bounce back to 2000 levels, at the beginning of 2011.
So in the law as now written, heirs to great wealth face the following situation: If your ailing mother passes away on Dec. 30, 2010, you inherit her estate tax-free. But if she makes it to Jan. 1, 2011, half the estate will be taxed away. That creates some interesting incentives. Maybe they should have called it the Throw Momma From the Train Act of 2001.
That's by no means the only weird element in the tax bill. Almost as bizarre is the sudden tax increase for upper-middle-income families scheduled for the end of 2004. Anyone who has been following the tax debate — in particular via the extremely informative Web site of the Center on Budget and Policy Priorities — knows that the alternative minimum tax is a major land mine lurking in the road ahead. Under the tax bill just passed, the number of taxpayers subject to this tax will balloon from 1.5 million to more than 36 million, with the result that many people — typically well-off but not rich families who already pay high state and local taxes — will find the tax cut they thought they were getting snatched away.
So why not fix the law? Because that would raise the budget impact of the tax cut by hundreds of billions of dollars. Still, the conferees felt they had to do something; so they included a partial fix for the A.M.T. problem. But even that partial fix, if maintained over the whole decade, would have made the tax cut too big to fit the budget resolution. So guess what? The A.M.T. fix is scheduled to expire in 2004, which means that according to the law millions of families will face a sudden large tax increase.
In short, the tax bill is a joke. But if the administration has its way, the joke is on us. For the bill is absurd by design. The administration, knowing that its tax cut wouldn't fit into any responsible budget, pushed through a bill that contains the things it wanted most — big tax cuts for the very, very rich — and used whatever accounting gimmicks it could find to make the overall budget impact seem smaller than it is. The idea is that when the absurdities become apparent — when mobs of angry junior vice presidents from New Jersey start demonstrating against the A.M.T., or when elderly multimillionaires develop a suspiciously high rate of fatal accidents — Congress will always respond with further tax cuts. And if the result of all those tax cuts is to prevent the government from ever providing the things Mr. Bush promised during the campaign, like prescription drug coverage under Medicare or increased aid to education — well, that was also part of the plan.
Someday, responsible politicians — or is that an oxymoron? — will have to untangle this mess. And yes, that means that some of the tax cuts Congress just approved will have to be rescinded. (How about a deal that fixes the A.M.T. and pays for the fix by returning tax rates on the top bracket to their 2000 level? Just a thought.)
But for now, it's a defensive game. The administration, having successfully rammed through a ridiculous tax bill, will try to bamboozle us on other matters. So the next question is whether men of honor will insist on honest accounting when it comes to Social Security reform. Yes, Senator Moynihan, this means you.
Originally published in The New York Times, 5.29.01