I admire the cleverness of Iowa Republican Senator Chuck Grassley's tax proposal. Bloomberg News reports that Grassley wants to introduce a bill that will link passage of a tax increase on private equity firms to an Alternative Minimum Tax (AMT) tax cut.
Grassley's proposal would increase from 15% to as high as 37.9% the tax rate that private equity firms pay on their profits with a measure shielding 23 million mostly middle-income households from an AMT increase this year. Unless Congress acts, the AMT will impose a $45 billion tax increase on 23 million households in 2007; permanently repealing the AMT would cost the government more than $1 trillion in revenue.
While it's not clear how much additional revenue the private equity tax rate increase would raise, the politics of the linkage is clever. That's because it will be hard for politicians seeking reelection to vote against a measure that could ease the lives of 23 million potential voters. If they happen to at the same time raise the taxes of those big campaign contributors, the need to help middle class AMT voters will offer the politicians some cover.
Peter Cohan is president of Peter S. Cohan & Associates He also teaches management at Babson College and edits The Cohan Letter.
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