WASHINGTON – Congress is trying to pass two big tax changes this year, preserving lower rates on capital gains and dividends and preventing the alternative minimum tax from reaching into the pockets of millions more taxpayers.
Republicans and Democrats disagree over who stands to benefit more from each change — the rich or the middle class.
"Contrary to what you might read on the editorial pages, this is not new tax relief for the so-called wealthy," said House Ways and Means Committee Chairman Bill Thomas, R-Calif.
"Middle-income families lose under this Republican tax cut bill," said Rep. Charles Rangel of New York, the panel's top Democrat.
In the House, the tax writing committee kept alive reduced tax rates on investment income, capital gains and dividends, in 2009 and 2010. If left alone, the maximum 15 percent tax rate would increase after 2008 to 20 percent for capital gains and regular income tax rates for dividends.
In the Senate, lawmakers would prevent the alternative minimum tax from pinching millions more taxpayers next year through a change that reduces that tax almost $32 billion. Invented as a mechanism to prevent the most wealthy taxpayers from evading taxes, inflation expands its reach every year unless lawmakers stop it.
Thomas said he opted to extend tax cuts for investment income rather than address the alternative minimum tax because it could help more taxpayers of all incomes.
"I did not want to put the wealthiest people getting a tax benefit in the package," he said. "There are far wealthier people, and fewer of them, who would receive the benefit under the alternative minimum tax."
Specifically, about 14 million would benefit from an alternative minimum tax change, but 62 million people would benefit from reduced rates on investment income, Thomas said. Households paying taxes on capital gains and dividends include older retirees, he added.
Democrats disagreed. Holding back the alternative minimum tax next year does the most for families earning between $100,000 and $500,000, they said, pointing to data produced by the Tax Policy Center.
Even if taxpayers at all income levels get capital gains and dividends, it's those earning $1 million who get more than half the benefit of reduced tax rates, they said.
"Without this extension, beginning next year, millions of middle-income households will face an increased tax burden," Rangel said. "The only clear winners under the Republican bill are the less than 1 percent of households whose annual income exceeds $1 million."
George Yin, chief of staff for the Joint Committee on Taxation, told the committee that more capital gains accrue to wealthier taxpayers, so those tax cuts "benefit predominantly higher-income people."
The Senate bill, under debate on Wednesday, doesn't include anything for capital gains and dividends because the GOP couldn't get enough support from moderate Republicans for its extension.
Democrats applauded the omission. The Senate Finance Committee's top Democrat, Max Baucus of Montana, said it turned a bill that would have sparked a "knockdown, drag-out fight" into a "moderate consensus."
The Senate Finance Committee's decision to fix the alternative minimum tax got support from both Republicans and Democrats.
"The AMT is terrible and should be repealed. Until such time, we owe it to American taxpayers to ensure that they are not hit by this tax," said Chairman Charles Grassley, R-Iowa.