House OKs tax plan along party lines

WASHINGTON -- Capping a spirited debate, the Democratic-led House voted Friday to shield more than 23 million Americans from a tax hike this year under the alternative minimum tax -- and hit up wealthy managers of private equity firms and hedge funds to make up the difference.

The 216-193 vote, which fell largely along party lines, escalated an emerging political war over tax fairness and the proper treatment of an elite class of investment managers who have benefited from the tax cuts of recent years.

It sparked angry Republican charges that Democrats were rushing to approve ill-advised tax hikes. For their part, Democrats argued with equal vehemence that they were acting responsibly and that if Republicans had their way, they would heap on new debt to cover the relief.

The debate now shifts to the Senate, where the tax increase faces resistance from some Democrats who are reluctant to raise levies on well-heeled donors from the financial world. The Bush administration already has said it would veto the plan.

House Speaker Nancy Pelosi (D-San Francisco) said the vote was a move away from White House fiscal policies, which she described as "tax cuts for the wealthy" financed by the middle class.

"Today we reverse that," said Pelosi, who added that House members were moving "to plant a flag for fiscal responsibility."

Republicans fired back that the bill was merely the first step toward major tax increases under the Democrats, who control both houses of Congress.

Rep. Charles B. Rangel (D-N.Y.), chairman of the House Ways and Means Committee, recently introduced a separate, much larger, long-term tax plan that would include an array of increases and reductions.

And :

House halts tax hike, but Dems feud over how to cover shortfallP>*************************EXCERPT***********************

Carolyn Lochhead, Chronicle Washington Bureau
Saturday, November 10, 2007

(11-10) 04:00 PST Washington --

House Democrats plunged Friday toward a collision between two of their most pressing political needs: to show fiscal responsibility and to stop a huge tax increase on 23 million middle- to upper-income taxpayers concentrated in Democratic strongholds like the Bay Area.

The House narrowly passed, 216-193, an $80 billion bill that would halt for one year the spread of the alternative minimum tax - known as the AMT - along with other provisions to help low-income people and extend a research and development credit for business.

Left alone, the alternative minimum tax could strike Bay Area households earning more than $100,000 this year. That threshold could drop to about $75,000 or less depending on the number of children in a family and the amount of the family's property taxes, mortgage interest and other deductions.

Rep. Ellen Tauscher, D-Walnut Creek, said the tax now hits 21,000 households in her 10th District, which covers parts of Contra Costa, Alameda, Solano and Sacramento counties. Come April, 92,000 households could pay thousands of dollars in higher taxes imposed by the alternative minimum tax if nothing is done.

"We have 23 million people at a grade crossing thinking there's no train coming, and they're going to start walking across in April and they're going to get whacked," Tauscher said.

That story is repeated in every Bay Area congressional district, where popular middle-class deductions for such things as high local and state taxes and costly mortgages would be wiped out under a tax that Congress created in 1969 to nab 155 high-income people who had escaped income taxes. But Congress never indexed the alternative minimum tax for inflation, and it has hit greater and greater numbers of taxpayers every year.

To plug the bill's $80 billion in projected lost revenue, House Democrats raised taxes on venture capitalists, hedge funds and other investment funds. Senate Democrats hate the idea, setting up a clash even as time is running out for fixes to be made for the current year.

The difficulty Democrats had in passing even a temporary fix to the alternative minimum tax demonstrates the much bigger budget troubles ahead when the Bush administration tax cuts expire in 2010.

A full repeal of the alternative minimum tax is estimated to cost $800 billion. Extending the Bush tax cuts would open a $3.5 trillion budget hole.

Democrats also have discovered a new political demography: More and more of their voters reside in the upper reaches of the middle class, concentrated along the coasts and in cities, while many Republican voters fall into the lower-middle class in the small cities and rural areas of the country's interior.

Democrats had to raise taxes on some people while lowering them on those hit with the alternative minimum tax to comply with the "pay-as-you-go" rule they imposed after winning their House majority. "Pay-go" is the benchmark of Democratic fiscal virtue in reaction to years of GOP borrowing for everything from the Iraq war to Medicare drug benefits. It is vital for conservative Democrats who captured seats in Republican-favored districts by campaigning on fiscal responsibility. But it also put the party in a budget vise.

Yes and no.

The private equity and hedge fund managers that are going to get hit are not in a position to directly raise prices and pass it along to consumers.

Instead, they will provide less capital because the higher taxes no longer justify the risk on some deals.

This will hit the consumer indirectly by creating fewer jobs and higher prices due to less competition amongst producers in those industries.

This chain of events is so indirect that the Dems know most voters won’t be able to follow it.

The media has used the terminology of “tax cuts” as though the wealthy have paid less. In actuality, there were no “tax cuts” but only “tax rate cuts” which incentivised the wealthy to earn more and actually pay MORE in taxes than before.

Whenever the liberal press asks any Republican about the “Bush tax cuts”, they should be corrected by saying, “You mean the Bush Tax HIKES, don’t you ?” and then explain how the wealthiest Americans are now paying more than before the tax rate cuts.

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