Necessary Investment Incentives?

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Pretty soon the alternative minimum tax is going to hit millions more taxpayers—even people making less than $50,000 annually. This extended reach will primarily harm those who work hard, pay property taxes, and have other deductions for things like dependent care, education, and health care. This AMT bite was never intended by Congress—it’s just reaching down the tax bracket because the figures it’s based on were drawn up decades ago.

You’d think this problem would be at the top of the tax reform agenda. Sadly, no. Rather, the big debate is over whether to extend tax cuts on investment income. As brilliant NYT tax reporter David Cay Johnston observes,

Among taxpayers with incomes greater than $10 million, the amount by which their investment tax bill was reduced averaged about $500,000 in 2003, and total tax savings, which included the two Bush tax cuts on compensation, nearly doubled, to slightly more than $1 million.

So this debate is basically about whether to make such windfalls permanent, or to try to stop our current fiscal irresponsibility and actually do something about our massive national debt.

But perhaps I misunderstand the issue. Is there a good policy reason for tax cuts for the superrich? Would they simply refuse to invest if better tax treatment weren’t given—choosing instead, perhaps, to roll around in vaults of money ala Scrooge McDuck? Would they renounce U.S. citizenship and move to the Isle of Man? I’m just trying to understand this policy on a higher level than positive political theory (which would, of course, predict that those best able to invest in money-intensive politics would get the highest returns). I guess I need to start reading the Tax Prof Blog!

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