Tuesday, December 04, 2012

End game

I don't think that the tax negotiations will end well this year.

Two years ago, the historic compromise was reached by December 6, and we started to blog about it here.    The legislative process was completed in just 11 days, by December 17, showing just how fast Congress can act when Christmas is coming.

No signs of compromise at all this year.  I just don't see how anything can be drafted by year end.

However, apparently the Senate produced legislation last summer to implement an extension of the Bush tax cuts to the bottom 98%.  It didn't have anything on the payroll tax holiday, the debt ceiling, or unemployment benefits.

ABC News reports on a "doomsday plan" by the House Republicans to bring that Senate legislation to the floor.  It does what Obama and the Democrats claim that they want.  Bringing it to the floor "releases the hostage" of the middle class tax cuts.  All Republicans would vote "present," so the bill would pass.  In the minds of Republicans, failing to stop a tax increase is different from voting for one.  I don't see the practical distinction myself.  But at least they could no longer be blamed for allowing the tax increases on the middle class, which is the corner that the Democrats backed them into.

Would the Senate bring it up? Would the President sign it?  It looks to me as if a surprising number of Democrats prefer to go over the cliff instead.

I haven't found the bill yet.  My question, did it include the inflation adjustment for the 2012 AMT?

Tax Notes reports that the IRS has already programmed their computers for another inflation patch to the AMT, assuming that Congress would never let that expire.  Some tax failures can be retroactively fixed, like the lapsed estate tax, but not this.  Per Tax Notes, failure to patch the AMT now will do much more than impose the tax on many more taxpayers, it will also delay tax refunds for everyone else by six weeks or so.  That delayed cash flow alone could have negative economic fallout.

If that Senate bill includes the 2012 AMT patch, I believe that the Senate would act and President Obama would sign it.  But that has to be concluded by December 17, when he leaves for Hawaii for the holidays.  I suppose that they could have a signing ceremony out there.

Final note.  This has been a titanic struggle just to leave the tax code unchanged.  Tax cuts have contributed to an economic bounce in the past.  Leaving the tax code unchanged has not.  Although the media talks about middle class tax cuts, no one will see lower taxes next year under any scenario.  Dodging a scheduled tax increase just doesn't excite the animal spirits the way ERTA did back in 1981.

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