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Strategies & Market Trends : Income Taxes and Record Keeping ( tax ) -- Ignore unavailable to you. Want to Upgrade?

To: Robert A. Green, CPA who wrote (1765)	1/18/1999 9:26:00 PM
From: Karin	Read Replies (1) \| Respond to of 5810

This is an article from today's Wallstreet. It concerns all of us and you should read it: Tax-Credit Mania Remember the loophole? This was a favorite standby of New Yorker magazine cartoons, depicting the monied set wallowing over the three-martini lunch. Yet for all the cultural sleaze that came with it, the loophole had one virtue. It mitigated the punishing effects of the steeply progressive rate structure that dominated the postwar years. The higher the tax bracket, the more valuable the loophole deduction. The same, alas, cannot be said for the loophole's mighty successor, the middle- and lower-middle-class tax credit. While the loophole has faded, tax-credit mania is in full flower in today's Washington. Both parties have spent the 1990s competing to see who can come up with the more extravagant credit. There's the earned income credit, which, thanks in good part to White House economics guru Gene Sperling and the social engineering team at Clinton I, has morphed from a tiny program into a national way of life. There's the dependent care credit. There's the child credit, icon of 1990s Republicans. There's the electric vehicle credit, and the nonconventional fuel credit, whatever that is. This month the White House has dropped a barrage of new "credit" proposals, the flavor of the day apparently being a credit for those who invest in poor neighborhoods. It's not hard to guess why the Beltway tax engineers like these credits. So long as they control the credits, they control the power. Like so many Santa Clauses, they dispense their bonbons to what they presume is a grateful citizenry. Besides, tax credits meet the only political requirement that is important these days: they play well in focus groups. Indeed, lawmakers have repeatedly used the excuse of "budget constraints" to exclude higher earners from claiming the credits. For the class warriors who populate Washington, the credit is the ideal tax weapon. Consumed as they are by their credit passion, lawmakers have lost sight of one thing: piling more credits on makes less and less sense. The Joint Tax Committee recently came forward with an astounding datum: because of all the credits and breaks politicians have given them, a full 48 million American taxpayers, almost all of them earning under $40,000, don't pay any income tax at all. Yet another credit isn't likely to do a thing for such people. Their income tax bill is already zero. This is not to say that lower earners' life in tax-credit land is an enviable one. For suppose these people do something Americans are wont to do. Suppose they begin to succeed, just a little. In short order, they then move past the $50,000, or $70,000, or $150,000 income cap on their credits. As the credits phase out, and the rate hikes phase in, these people start to confront marginal rates that, in tax hells like California or New York, can range well into the fortieth percentile. In other words, we now have a tax structure that tells workers: Stay where you are. Stay down, stay poor. Don't earn more. Don't make it, and don't let the economy grow. Be grateful, instead, to the political class that controls your handouts. This suits Democrats just fine. They'd rather maintain their cloth-eared focus on equity than consider citizens' tax reality. The good news is that the status quo is beginning to make Republicans uncomfortable. Republican budgeteers are waking up to the realization that serious budget surpluses are about to give them more tax-writing leeway than they've seen in decades. In other words, we now have an almost unprecedented opportunity to set about fashioning true tax relief and give up the credits, the breaks and the gimmicks.