A New Congress - What Can We Expect?

In my last commentary I said, among other things, “there has been much talk of bipartisanship by both the Administration and the Democratic leadership but that is nothing more than posturing. In almost every area of policy the parties are too far apart for compromise to be possible.”

“The Administration as one of its first acts after the recent election announced that it would renominate six of his earlier choices to sit on the federal appeals court, leaving Democratic senators and other analysts to ponder what message he is sending.

“Mr. Bush's motive in sending up the nominations has been closely analyzed, with several Democrats and liberals labeling it as provocative and a sign that he does not intend to seek compromise as he suggested he would after Republican losses in the elections last week.

“Democrats have asked the president to be bipartisan, but this is a clear slap in the face at our request,'' said Senator Charles E. Schumer, Democrat of New York” (From the NY Times of November 16)

Democrats on the other hand are determined to push their agenda with an increase in the minimum wage being at the top of the list. As I discussed in my last presentation this is not something Republicans are likely to accept, except as part of a deal on the estate tax, a price Democrats are not likely to be willing to pay.

Another issue likely to be on the front burner is college tuition costs. The Administration, as well as such Republican columnists as David Brooks, have said repeatedly that the solution to the nation’s growing income inequality is more education. However, even as they make that argument the Administration has been consistently cutting back on student aid. For instance Pell grants one of the most important programs for low-income college students has steadily declined. Pell Grants now cover about a third of the average costs at a four-year public school, compared with 42 percent five years ago. Government loans also have not kept pace with rising costs. Subsidized loans accounted for only 55 percent of student borrowing in the most recent academic year, down from 69 percent 10 years earlier. Democrats will undoubtedly try to reverse that trend. Republicans on the other hand are likely to oppose this as being “unaffordable.” This is likely to be another area for stalemate at least until the Presidential election two years hence.

One area that has gotten a great deal of publicity lately is the Alternative Minimum Tax. At the time this tax was enacted it was designed to prevent the super-rich from using deductions, credits, and other shelters to avoid paying any taxes. But because of rising incomes, the tax is expected to expand from 3.8 million of the upper middle class to more than 30 million of that group in 2010, a constituency both parties are courting. The mistake that was made in enacting this tax was not to have it adjust by the inflation index. Now, however, it has been dealt with on a year-to-year basis, but to hold the number of affected taxpayers steady at about 4 million, the patch would cost about $50 billion. To do away with the tax it is estimated would cost more than $1 trillion (1,000 billion) over the next decade. My own view is that the tax should not be eliminated but should be fixed permanently by making it automatically adjust by the inflation factor and that any measure passed should be revenue neutral by eliminating some other tax previously passed by the Republican Congress. Here there may be room for compromise, but I strongly suspect that Republicans would hold out for making it just another tax cut, thereby increasing the deficit, something which seems to have become almost a matter of faith with the party that once prided itself on its reputation for fiscal responsibility and balanced budgets.

Another matter in the area of taxation that will come up is the so-called marriage penalty, which I suspect is not widely understood. Essentially it is inaccurate to assume that all married couples pay a marriage penalty. Where the incomes of the partners are disparate they not only do not pay a penalty they actually get a benefit. Thus if one of the partners has a significant income and the other has none or a substantially smaller one, the married couple will in fact pay less taxes than if they had remained single. On the other hand if the couple has substantially equal incomes they will end up paying a somewhat higher tax than if they were single. One way to avoid this is to allow couples the option of filing singly or married whichever way would benefit them most. The loss in tax revenue would most likely be substantial. Furthermore, by offering this advantage to married couples we are in effect discriminating against unmarried ones who do not have this option. Furthermore, according to Microsoft Money forty-two percent of married taxpayers paid more because they were filing jointly than they would have if they remained single, according to a 1996 Congressional Budget Office analysis. The average penalty was a significant $1,380. But more couples -- 51% of the total -- paid less tax jointly than if had they not married. The average bonus these couples received: $1,300. So it may be that this is an area that should be addressed with caution.

Whether Democrats will want to touch this hot potato is questionable though Republicans will most likely try to demagogue this and try to make it a pro family issue.