Cheating On Your Taxes

A photo of the young monarch is displayed with dresses and jewelry she wore at Buckingham Palace on July 25, 2006. The largest-ever exhibition of her gowns is on display during the annual summer opening of the queen's London home.
Getty Images/Peter Macdiarmid
In his latest Against the Grain commentary,'s Dick Meyer examines the new tax bill and finds more gimmicks and loopholes than real tax relief.

The tax legislation Washington has just delivered unto us all is, to paraphrase Winston Churchill, a con game wrapped in cooked books inside a ponzi scheme.

This particular bill is so dishonest that it gives smoke and mirrors a bad name. This holds true regardless of whether you abhor or adore tax cuts in general.

A very liberal think tank, the Center on Budget and Policy Priorities says that the bill "appears to contain more budget gimmicks than any tax bill – and quite possibly any piece of major legislation – in recent history."

A very conservative editorial page, The Wall Street Journal, declares, "Some of the tax bill phases in so slowly as to be imperceptible; some of it phases out so dramatically as to be neck-snapping…. and all of it vanishes in nine years unless Congress waves its wand over the whole thing."

That wand will be needed to overcome the mother of all gimmicks: a bizarre footnote that says that all the law's new provisions and reductions expire at midnight, December 31, 2010.

Poof, you're a pumpkin.

Why would they do that? There's only one reason: to hide the real cost of the legislation in order to comply with budget limitations imposed by other laws. Without the "expire in 2011" trick, budget ciphers would have to factor in revenue losses of another $4.3 trillion between 2012 and 2021, according to the Center of Budget and Policy Priorities. And that would violate so-called "budget caps."

Calm down, Republicans say, no one will allow these popular tax breaks to actually expire in ten years. Future Congresses will take care of everything. Trust us, we're politicians.

Right. How do they know what will happen in ten years?

All the gimmicks in the bill are similarly meant to disguise the actual cost of the legislation. We're used to a different kind of tax trick – hidden, narrowly targeted business tax breaks or pork-barrel goodies. To its credit, the Bush administration pretty much fought off these kinds of loopholes.

Instead, we're stuck with a "now you see it, now you don't bill." Tax cuts you think you've been promised don't actually kick in for a few years. Or else they expire in a few years. Or both.

For example:

  • The estate tax. "Death tax repealed," say the press releases. "Repeal fully effective on January 1, 2010," says the fine print. But the truly goofy thing is that the repeal itself is repealed on December 31, 2010. (Unless, of course, Congress waves its magic wand.) So not only is the elimination of the estate tax delayed for a decade, it then only lasts for one year. Economist Paul Krugman, writing in The New York Times, calls this the "Throw Momma From the Tran Act of 2001." If Momma dies on Dec. 31, 2010, Sonny pays no estate tax; if Momma holds on until New Year's Day 2011, Sonny pays. Watch it, Momma.
  • The marriage penalty. The biggest bragging item in the bill may be the elimination of the so-called marriage penalty, an anomaly in current law that causes some married couples to owe more than they would if they filed as singles. It turns out that promised reductions in the marriage penalty don't start until 2005, and the penalty won't be fully eliminated until 2009. And once again, the elimination of the elimination kicks back in two years later. The marriage penalty is gone for just two years. Unless Congress waves its magic wand.
  • The alternative minimum tax. The AMT was designed to ensure that top-tier taxpayers who use lots of deductions and credits still pay a certain minimum tax. It applies to about 1.5 million tax returns now, but because of some glitches, it would afflict perhaps 36 million more taxpayers in the coming years. So Congress devised a fix in the new law. Unfortunately, the fix lasts only until Dec. 31, 2004. Keeping it any longer would bust the budget caps. But don't worry – wink, wink, nudge, nudge – it'll be taken care of when the time comes.
  • College tuition. Couples with incomes under $135,000 and singles with incomes under $65,000 have been told that they would be able to deduct up to $4,000 in college tuition from their taxes. But the deduction won't be in place fully until 2004. And, of course, it expires at the end of 2005. It's a two-year tax break, which makes a lot of sense.
Whatever the macro-economic effects of the legislation, the stunts are micro-stupid. And whatever the fairness arguments about these tax reductions, it's not fair to turn them on and off. We've heard a lot of talk about tax reform. This is tax deform.

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