Friday, December 07, 2007

AMT Fix Held Hostage by Republicans

Republicans—The Party Striving to Bankrupt the Government—Today, Senate Republicans showed their true colors, by putting rich donors ahead of our kids. They blocked a desperately-needed extension to the AMT-patch. Why did they do this? A little history is needed to answer that.

The AMT tax is a parallel tax system designed in the 60’s to fix a problem. 255 families avoided paying any taxes through excessive deductions. Congress designed the AMT to assess a minimum tax level on everyone’s income, even without normal deductions. Unfortunately, a lot has changed in the past 30 years, and the AMT does not have an annual inflation-adjustment. Without a patch, the 2007 ‘exemption amount’ not only wouldn’t rise with inflation, it falls 28% to $45,000 for a couple. Without a patch, the 2007 AMT will catch tens of millions more taxpayers than in 2006.

Both Republicans and Democratic Congresspersons want to fix this (since they don’t want to lose votes in 2008). The Republicans, however, want to fix it in an interesting way, by charging it. Yes, this week they objected to following the Democratic designed ‘PAYgo’ system, where a bill with a tax cut has to provide revenue to PayAsYou go. The Republicans merely want to add $51 billion to the deficit, and let our kids and grandkids worry about it.

The Democrats (remember when Democrats were chastised for tax and spend?) instead offered a way to partially pay for it. They wanted to have hedge fund managers pay their fair share. Hedge fund managers typically are paid ‘2 and 20’, 2% on the size of their funds plus 20% of any investment return. So if a hedge fund manager runs a $100 million hedge fund that earns 10% in 2007, they would receive $2 million plus $2 million, or $4 million. Not bad for a year’s work.

You would think that the $4 million the manager receives is taxed as ordinary income, right? Wrong! It is called ‘carried interest’, and enjoys the very low long-term capital gain treatment. Just think if your W2 income was taxed at only 15%--that sure would be nice! By fixing this loophole, Democrats could pay for much of the necessary AMT-fix. There is only one problem—Republicans in the Senate.

If you live in a state with a Republican Senator, contact them and insist that they stop the gravy train for hedge fund managers, that they stop holding AMT relief hostage to maintaining a loophole for hedge fund managers, that they return to their roots of fiscal responsibility, and follow the Democrats’ PAYgo system which protects future generations from a crushing federal debt.