TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, September 29, 2010

New Issue of Regulation

Regulation The new issue of Regulation, Vol. 33, No. 3 (Cato Institute Fall 2010) contains these tax articles:
Tax subsidies have grown in importance to a size unimaginable 40 years ago, when tax expenditures first were identified as a budget problem. The current congressional appetite for tax expenditures has distorted not just tax policy, but also the budget process and congressional oversight of the money it spends. The tax-writing committees have employed tax expenditures to extend the committees’ reach and to become, in fact, a Congress within the Congress. They present new spending policies embedded in “revenue neutral” tax legislation in ways that are largely invisible in standard budget presentations. It is time to redirect tax expenditures to those cases where they represent the most appropriate technical delivery mechanism for government spending.

The AMT is, we admit, an unlikely place to find a solution to the problem of state finance in times of crisis. Each of the more obvious candidates, however, has serious flaws. States cannot tax, borrow, or save enough to meet their residents’ needs for social insurance. Other federal supports lead to moral hazard, are wasteful, or are too poorly timed to be effective. Thus, automatic stabilizers assume an important role in smoothing incomes. And, as the data suggest, the amt is a powerful automatic stabilizer. Accordingly, we would resist efforts to repeal or “patch” the amt. Instead, we suggest that greater attention to the details of the amt, and the tax-lawmaking process that surrounds it, can greatly improve state responsiveness to recessions.

We have argued that soda taxes are unlikely to correct for any real or imagined problems related to our nation’s obesity rate. It is not only unclear that soda causes obesity, but even if it did, policymakers have neither the technical expertise nor political courage to set taxes that correct any externality problems. Even if policymakers did have such expertise, soda taxes would likely be regressive, as lower-income households spend a greater share of their income on soda than higher-income households. As such, soda taxes would disproportionately fall on the poor — soda drinkers who may or may not be obese. If non-obese individuals truly pay some of the higher health care costs of the obese, the best solution would be to correct this negative externality through imposing surcharges on health insurance premiums of the obese.

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I disagree with the AMT article.

It is true that reducing everyone's income by 10% would reduce AMT liability and increase the value of state income tax deductions. But that's not what happens in a severe recession. Instead 90% of the people maintain their income, and 10% drop to zero.

The 90% with jobs have no reduction in AMT liability, and the 10% with zero income get no benefit from deductibility of state and local taxes. This does not stabilize anything.

Some stabilizing effects occur when people are employed for only part of a year. That doesn't apply very well to today's situation, with multi-year unemployment.

Posted by: AMTbuff | Sep 30, 2010 12:03:33 PM