Wow, this is remarkable. The alternative minimum tax (AMT) is one of the most-hated features of the tax code. It is such a nightmare of complexity that even Democrats routinely have supported “patches” and “band-aids” to protect millions of additional households from getting trapped in this surreal parallel tax universe — one that requires taxpayers to calculate their taxes two different ways, with the IRS getting the maximum amount of money from the two returns. (Hong Kong, by contrast, give taxpayers the option of calculating their taxes two different ways, but they’re allowed to pay the smaller of the two amounts.)

Notwithstanding the AMT’s status as arguably the worst feature of the internal revenue code, President Obama apparently wants to double down on this horrific policy by creating a new version of this nightmarish provision.

Here are some excerpts from the Wall Street Journal’s coverage, including a key observation that Obama’s scheme is just another version of the AMT.

The administration’s principle resembles the Alternative Minimum Tax, which was first adopted in 1969 and was intended to hit the superwealthy. The AMT has been hitting an increasing number of the middle class because it wasn’t indexed for inflation, and Congress has continually wrestled with how to get rid of it.

The WSJ article also notes that a glaring inconsistency in the White House’s rhetoric. the plan is supposed to be a “very significant” tax hike, but doubling the tax burden on millionaires would only raise $19 billion per year. In other words, the Administration’s class-warfare rhetoric is probably just cover for a tax hike that actually will hit a lot of people with far more modest incomes.

The proposal also could apply to a broader selection of taxpayers—all households with incomes of more than $1 million. Those earners are expected to pay an average of $845,000 this year, according to the nonpartisan Tax Policy Center. Assuming the households in the group of 22,000 pay that amount, even doubling their tax burden would raise just $19 billion a year at a time when deficit reduction is being measured in trillions of dollars. That doesn’t take into effect any change in taxpayer behavior prompted by a new tax regime. A senior administration official said that depending on where the minimum rate is set, the plan could be a “very significant” revenue raiser. The official wouldn’t provide details. …Some conservative economists say such a proposal could put a drag on capital markets and ignores the fact that many companies have already paid tax on the income before it is distributed to owners as dividends or capital gains.

The New York Times, to its credit, provides a fair description of the issue (including a much-needed acknowledgement that Warren Buffett may not have been honest and/​or accurate), and also suggests that Obama may be proposing to replace the existing AMT with this new version (though that presumably would negate its impact as a revenue-raiser).

Mr. Obama will not specify a rate or other details, and it is unclear how much revenue his plan would raise. But his idea of a millionaires’ minimum tax will be prominent in the broad plan for long-term deficit reduction that he will outline at the White House on Monday. Mr. Obama’s proposal is certain to draw opposition from Republicans, who have staunchly opposed raising taxes on the affluent because, they say, it would discourage investment. It could also invite scrutiny from some economists who have disputed Mr. Buffett’s assertion that the megarich pay a lower tax rate over all. Mr. Buffett’s critics say many of the rich actually make more from wages than from investments. …The administration wants such a tax to replace the alternative minimum tax, which was created decades ago to make sure the richest taxpayers with plentiful deductions and credits did not avoid income taxes, but which now hits millions of Americans who are considered upper middle class.

Actually, the AMT also hits lots of middle-class families since having kids is considered a “preference” for tax purposes.

But that’s just an insult layered on top of injury. What makes Obama’s new scheme so destructive is that it would (though the White House has not explained the details) somehow classify dividends and capital gains as “preference” items — even though everyone acknowledges that such income already is double taxed!

In other words, Obama claims to be concerned about jobs, but he is proposing a big tax hike on the saving and investment that is necessary to create jobs. Amazing.

Regular readers will recognize this video about Obama’s class-warfare tax policy. But if you haven’t seen it, five reasons are presented to explain why it will backfire.

But look at the bright side. At least accountants and tax lawyers (and don’t forget bankruptcy specialists) will get more business if Obama’s plan is implemented.

The center-right consensus is that in order to balance the budget and improve health care, Congress needs to overhaul Medicare using some form of voucher or premium support. Whereas the current program offers an essentially unlimited subsidy for medical care, under these options Congress would give each enrollee a fixed subsidy with which they could purchase private health insurance. But how should Congress determine the size of these fixed subsidies?

The House GOP approved a budget under which Congress would pick the amount. Beginning in 2022, all new enrollees would receive a voucher. The average voucher amount would be equal to the average amount Medicare currently spends per enrollee in 2011, adjusted for overall inflation. Congress would adjust the actual voucher amount for each enrollee based on health status and income, so some enrollees would receive larger and some would receive smaller vouchers. But since the average voucher would grow at the rate of inflation (i.e., about 2.5 percentage points slower than per-enrollee Medicare spending currently grows), this approach would reduce Medicare spending over time.

A drawback of this approach is that opponents can (and do) demagogue it, claiming that the vouchers would be insufficient and seniors would die for lack of medical care. This demagoguery ignores two important factors.

First, as Peter Orszag and President Obama themselves loved reminding us during the ObamaCare debate, there is lots of wasteful spending in the Medicare program. Orszag frequently cites the Dartmouth Atlas, which estimates that one third of Medicare spending is pure waste. Since the amount of the House GOP’s vouchers would be based on per-enrollee Medicare spending, they would essentially give Medicare enrollees 50 percent more money than they would need to purchase all the beneficial medical care that Medicare currently provides. The vast amount of wasteful Medicare spending is a disgrace. But when converting to a voucher system it’s an absolute boon, because it provides a huge margin of safety. It means that enrollees could reduce their medical consumption by one third without harming their health.

Second, the anti-reform demagogues presume that vouchers would do absolutely nothing to make health care more efficient. Vouchers would make the nation’s 50 million heaviest consumers of medical care cost-conscious in a way they have never been before. Like an old man trying to send back soup at a deli, they will force providers to cut costs and thereby make their vouchers go farther.

It is because of this second factor that Yuval Levin proposes a different way of setting the voucher amount(s). Levin proposes to use a competitive-bidding process. Under this approach, everyone in Medicare would receive a voucher equal to the second-lowest bid that health plans submit to provide a standard package of benefits. Enrollees could then apply their voucher to any private plan or even a government-run plan. Under this approach, enrollees would still be cost-conscious: if the health insurance policies they choose cost more than the voucher amount, they would have to make up the difference; if the policies cost less, they would keep the savings. Levin argues that this cost-consciousness would also lead enrollees to put pressure on providers to cut costs, and therefore the amount of the second-lowest bid would automatically grow at a slower rate than per-enrollee spending under the current Medicare program. “In such a system,” Levin writes, “the premium-support benefit would grow exactly as quickly as required to provide a comprehensive insurance benefit, since the growth rate would be determined by a market process rather than a preset formula. ” Voila! The competitive forces of the market would cut Medicare spending.

The best evidence that competitive bidding will reduce Medicare spending is that the durable medical equipment manufacturers have fought efforts to impose it on them. So while I’m not hostile to the idea, I don’t think it’s an improvement over the House GOP plan.

First, Levin calls competitive-bidding “the Confident Market Solution” because he is confident that markets will reduce the cost of health care. I’m confident of that too. But I’m also confident that rent-seeking will be present in Medicare, no matter what reforms Congress enacts. I am far less confident that markets will reduce costs faster than rent-seeking will increase them. My sense is that politicians will be much more likely to hold the line on rent-seeking if they actually draw one.

Second, House Budget Committee chairman Paul Ryan (R‑WI) crafted a House budget that proposed to reduce the growth of Medicare spending using hard, score-able numbers. Hundreds of House members likewise stuck their necks out by voting for it. The Confident Market Solution essentially undercuts those folks by telling them they should not have done something so bold and courageous. Levin is no doubt correct that a competitive-bidding process that doesn’t specifically commit Congress to reducing Medicare spending growth is more politically feasible than a voucher plan that does. When politicians choose the more politically perilous option, however, reformers should tell the world why that was the right thing to do.

Third, Levin would include a public option in the competitive-bidding system. I am also confident that the government would heavily subsidize that health plan until it drove private insurers (and any hope of cost-cutting innovations) out of the market.

I’ve discussed what I think is a better approach to Medicare reform here and here.

Today is Constitution Day, marking the day in 1787 when the Framers signed the document they’d spent that long hot summer drafting and sent it out to the states for ratification. In a striking change from not that many years ago, this morning’s papers bring us two significant articles about the current debate over the document.

In The New York Times, Kate Zernike’s “On Day Devoted to Constitution, a Fight Over It” notes how the Tea Party has made the Constitution sexy again, but how doing so has become occasion for battle. Progressive groups, she writes, “accusing the Tea Party of selectively reading the founding document, have responded with a campaign to ‘take back the Constitution’”—the very cry we’ve heard from the Tea Party since its inception three years ago.

Meanwhile, in this morning’s Washington Post, David A. Fahrenthold’s “Congress finds, and lists, meaning in Constitution” focuses on the pledge House Republicans took last January to cite the constitutional authority for any measure they introduced and on how that pledge has played out since then. Not surprisingly, it’s a mixed record, as he details.

But the larger lesson to be drawn from both articles should not be missed. We are again talking about the Constitution. And as Zernike writes, “In one respect, the Tea Party has already won. When groups on the left talk about the Constitution, they are increasingly emphasizing the original text — as the originalists do — rather than the Supreme Court decisions that have upheld programs like Social Security.” That is a distinction we at Cato’s Center for Constitutional Studies have long drawn, namely, that there’s all the difference in the world between modern “constitutional law”—the post-New Deal Supreme Court decisions we live under today—and the Constitution itself.

And we’ll take credit too for helping to bring this debate back to life, because when the Center was created 22 years ago, we took it as central to our mission to revive that debate—in particular, to help change the climate of ideas to one more conducive to reviving the Framers’ Constitution of liberty through limited government. Toward that end, two days ago we held our tenth annual Constitution Day conference, releasing there our tenth annual Cato Supreme Court Review.

Read this morning’s articles. Then go here for answers to many of the questions they raise.

I recently discussed why the additional federal subsidies for state and local government that President Obama is proposing as part of his “job plan” are a bad idea. A new study from two Harvard economists suggests that the president’s affinity for these subsidies might have something to do with the fact that the aid would be particularly helpful to states with more left-leaning legislators and strong public sector unions.

The study from Daniel J. Nadler and Sounman Hong (see here) found that states with stronger public sector unions and a higher proportion of left-leaning state legislators face higher borrowing costs:

We find that, all things being equal, states with weaker unions, weaker collective bargaining rights, and fewer left-leaning state legislators pay less in borrowing costs at similar levels of debt and similar levels of unexpected budget deficits than do states with stronger unions and more left-leaning legislators. More practically, these findings suggest that the strength of public sector unions has become among the most important factors in bond market perceptions of a state’s risk of financial collapse.

Why do these states face higher borrowing costs? Nadler and Hong explain:

These “political” factors might signify to the bond market whether a state government has the willingness and capacity to initiate needed fiscal adjustments and austerity measures during the state fiscal crises that followed the financial crisis, and thus might provide some information to market participants about the likeliness that a given state government will choose to default on its debt instead of making politically difficult or undesirable budget cuts. Similarly, public sector labor environment variables, such as union strength, might signify to market participants the degree of organized political opposition state lawmakers would have to overcome to implement such austerity measures.

In a corresponding Wall Street Journal op-ed, Nadler and Paul E. Peterson, director of Harvard’s Program on Education Policy and Governance, do a nice job of explaining why the separation of responsibility between the federal government and the states has been crucial to the country’s economic rise:

Federal rescue of states is a dramatic departure from past practice. State bankruptcies date back to the 1840s when, amid a financial crisis, Pennsylvania, Michigan, Illinois and five other states discovered they had invested too heavily in infrastructure. The last state bankruptcy was in Arkansas during the 1930s. But overall the instances were few; in each case the federal government refused to come up with a fix.

Bankrupt states paid the price, but for the country as a whole, a system of fiscally sovereign states has proven incredibly beneficial to the nation’s economic well-being. Every state is responsible for its own police, fire, schools, transport and much more, and most of the time they do reasonably well. If they manage their affairs so as to attract business, commerce and talented workers, states prosper. If states make a mess of things, citizens and businesses vote with their feet, marching off to a part of the country that works better.

It is this exceptional federalist system that helped drive the rapid growth of the American economy throughout the first two centuries of the country’s history. Because state and local governments competed with one another for venture capital, entrepreneurial talent and skilled workers, governments generally had to be attentive to the needs of both citizens and commerce.

Unfortunately, the 20^th century’s trend for the federal government to subsidize and manage more and more state and local affairs has worsened in the last 10 years as the chart in my blog post shows. If our bloated federal government is ever to be reined in, a return to fiscal federalism is a must. And if the states are to get their financial houses in order, state policymakers can’t be allowed to believe that a federal policy of “too big to fail” applies to them. (See this Cato essay for more on fiscal federalism.)

From Fall 2008 through Summer 2009—the most intense months of the “Bailruptcy Era”—I ventured on occasion to question Ford’s near total silence in the face of an unprecedented intervention to rescue its chief rivals from a hard-earned fate. In pondering whether Ford would defend its interests, I wrote:

There is probably no company in America that stands to lose more from taxpayer subsidization of GM and Chrysler…

 If GM and Chrysler were no longer producing, Ford would be able to pick up market share and productive assets from the others, and ultimately improve its own long term prospects. By keeping GM and Chrysler afloat with subsidies, the government is implicitly taxing Ford. Ford is facing unfair, government-subsidized competition, of the sort alleged against foreign producers all the time. But in this case, the subsidies are real, direct, quantifiable, and large.

Well, Ford did remain silent about the rescue operation (for reasons I never found particularly compelling). 

Fast forward to Ford’s Summer 2011 television advertising campaign, which includes commercials featuring Ford customers giving press conferences to answer questions about why they chose Ford. One of those commercials (this one, HT Gene Healy) has the customer explaining that he’d never buy a car from a company that was bailed out by our goverment, which, as it turns out, is a compelling determinant of demand these days. 

In branding itself as the unbailed-out Detroit producer, Ford has politely ended its silence on the matter of the GM and Chrysler bail-ruptcies, in a very smart, respectable manner. And by using actors instead of executives to speak ill of the auto intervention, Ford keeps its own bailout raincheck in a safe place, should the inclination to redeem it ever become irresistable. 

Somebody at Ford deserves a raise.

Over at Downsizing the Federal Government, we focused on the following issues this past week:

• Federal Davis-Bacon rules could increase the price tag for Washington D.C.‘s CityCenter development by $20 million.
• The U.S. Postal Service is running on fumes. What will Congress do?
• The President’s jobs bill would do nothing for education and would hurt the economy.
• The Budget Control Act will likely produce either a minuscule defense cut in the near term or no cuts at all.
• As the political circus over the Solyndra loan unfolds, let’s not lose sight of the fact that the more important question is whether taxpayers should be forced to subsidize energy companies to begin with. They shouldn’t.

Follow Downsizing the Federal Government on Twitter (@DownsizeTheFeds) and connect with us on Facebook.

Postal expert Alan Robinson’s Courier, Express, and Postal Observer blog is always an interesting read, but his latest two posts are particularly worthwhile.

The U.S. Postal Service’s financial woes are starting to attract commentary from prominent thinkers. In the first post, Robinson looks at recent articles from Felix Salmon, Gary Becker, and Richard Posner and concludes that while their analyses are incomplete, their observations deserve further consideration. The three pieces share a common theme: a government postal service micromanaged by Congress and regulators is no longer workable. Thus, it is time to consider reforms such as deregulation and privatization.

As Robinson notes at the outset, “any postal reform measure has to go beyond fixing retiree obligations or restructuring operations to reduce costs.” Robinson believes that a failure by policymakers to address three issues in particular will probably force Congress to re-examine the USPS’s business model again in a few years (I know, Congress kicking the can down the road? Shocking.):

1. Profit must be an explicit goal for the organization and profit must reflect a sufficient operating margin to ensure cash is generated to make capital investments needed to improve service once the current financial difficulties pass. There is no excuse for the Postal Service to be the only large national post suffering major losses in the Euro Zone, North America, and Oceana and Australia.

2. The Postal Service has to be granted significant relief from both congressional and Postal Regulatory Commission oversight. To the extent that either law or regulatory precedent freezes the status quo and prevents market-based pricing and market-based service quality, that law and those regulations must be removed. In particular both restrictions on distance-based and regional pricing for commercial mailers need to be lifted in order to develop market-based and not cost-based prices.

3. Transition of the Postal Service to an entity that operates under standard corporate business, employment, and contract law must occur within a reasonable period. During this period, the privatization of the Postal Service as a public utility providing delivery services must be seriously examined.

The second post is related to Robinson’s issue #1: the need for capital investments to improve services and reduce operating costs. According to Robinson, the USPS’s new proposal to restructure its processing and transportation network is a “second-best option” because “pricing, financial, and labor contract constraints prevented it from making a proposal that could provide better service or further reduce operating costs.”

Robinson’s analysis of these constraints is informative, but it’s his conclusion that is worth highlighting here:

The capital constraint illustrates that significant investments in plant and equipment could reduce costs and increase profits. The capital constraint illustrates than maintaining the current payment schedule for retirement obligations, or adding more debt to cover those obligations would not help the Postal Service develop a network that optimally minimizes cost or sets the capital/​labor ratio. The capital constraint hints that the Postal Service, cleared of the disputed portion of its retirement obligations, would be attractive to private investors who could use their capital to make network improvements that the Postal Service could not afford as long as it remains a government enterprise.