Our View: Ready for a Pelosi Tax Hike?

When House Minority Leader Nancy Pelosi (D.-Calif.) appeared on NBC’s “Meet the Press” on May 7, host Tim Russert repeatedly pressed her on whether she would try to repeal the tax cuts enacted by President Bush and the Republican Congress. Pelosi eventually broke down and gave a partial answer.

“Well, I, myself, am against them,” she said. “But the point is, there are choices to be made in our budgets, and, and I will tell you more the Democrats are going to do when we take over the Congress of the United States.”

Count on it: If Pelosi takes over as speaker in a Democrat-controlled House, she will let all of the Bush tax cuts—which are scheduled to sunset by 2011—expire. Every American who pays taxes will get a tax increase.

‘Immoral Tax Breaks’

Just three days after her appearance on “Meet the Press,” Pelosi voted in favor of letting the Bush tax cuts on capital gains and dividend income expire after 2008 (rather than extend them through 2010) and in favor of exposing—in this tax year—an additional 15 million middle-class Americans to the insidious Alternative Minimum Tax (AMT). All but 15 members of Pelosi’s party in the House voted with her for higher taxes.

Fortunately, Pelosi lost 244 to 185, when all but two Republicans stuck with their party, voting to extend the capital gains and dividend tax cuts and stop the AMT from bludgeoning middle-class taxpayers for at least another year. The Senate passed the bill the next day in a similar partisan vote.

Before 2003, capital gains were taxed at 20% for people who paid income taxes in the 25% bracket or higher (i.e., any single person who made more than $30,650 in taxable income and any couple who made more than $61,300), and at 10% for people in the lower income brackets. Dividends were taxed at the regular income tax rates, which run as high as 35%. The 2003 tax cut dropped the rates on both capital gains and dividends to 15% and 5%, with the 5% rate (for people in the lower income brackets) dropping to 0% in 2008. These lower capital gains and dividend tax rates, however, were all scheduled to expire at the end of 2008.

After the capital gains and dividend tax rates were cut, two things happened: 1) Federal revenues derived from capital gains and dividend taxes increased, according to the Wall Street Journal, by 79% and 35% respectively. 2) The economy boomed, spurring a growth in jobs and income for American workers.

Unemployment is now at a remarkably low 4.7%, lower than the average unemployment rates for the last three decades. In the first quarter of this year, according to the Bureau of Economic Analysis, the economy grew at a 4.8% annual rate. Consumer spending increased 5.5%. Business investment in new equipment and software increased 16.4%.

Real disposable personal income increased 6.7% in the last quarter of last year and 3.2% in the first quarter of this year.

This brings us back to the Alternative Minimum Tax. This tax was ostensibly designed only to make sure “rich” people could not exploit loopholes in the tax code to avoid paying any taxes at all. However, because the AMT was never indexed for inflation and does not allow taxpayers to claim deductions for dependent children or for local income and property taxes, it is really a backdoor through which the federal government can increase taxes on middle-class families. If Congress failed to change the AMT, according to the Treasury Department, it would hit an additional 16.7 million taxpayers for the first time this year. 

The Republican tax bill that Pelosi and most House Democrats voted against last week will spare 15 million of those taxpayers from the AMT. It does so by expanding for one year the amount of income exempted from the tax and also by exempting from it refundable tax credits such as the Bush tax credit for dependent children.

House Democrats refused to spare these 15 million middle-class taxpayers from the AMT unless Republicans dropped their plans to extend the expiring tax cuts on capital gains and dividends.

In effect, the Democrats said: Unless Republicans vote to choke off our growing economy by increasing the taxes on investments, we will insist on increasing income taxes on the people who benefit from those investments through better jobs and wages.

Of course, the Democrats defended their anti-economic-growth position with hysterical class-war rhetoric. Rep. Sander Levin (D.-Mich.) said that extending the capital gains and dividend tax cuts meant “caviar for the wealthy and crumbs for mostly everybody else.” Rep. Pete Stark (D.-Calif.)—the very wealthy, left-wing former bank owner—called on his Democratic colleagues “to stand up for the working class and vote against these irresponsible and immoral tax breaks for the rich.”

The truly irresponsible and immoral position, of course, is the one staked out by Pelosi, Stark and their party. People who pay capital gains and dividend taxes must first save money and invest it wisely. They are frugal producers of wealth, not improvident consumers of it. If the Democrats regain Congress, we will have a legislature run of, by and for those who consume tax dollars extracted from other people’s hard work and savings.