SYNOPSIS:

DAVID BRANCACCIO, anchor: You and I need to have a chat about the big tax cut that both houses of Congress agreed upon going into the weekend. But first, a pair of definitions. AMT stands for alternative minimum tax designed to keep people from getting away with too many tax deductions. You also need to know the word 'sunset.' That's the date a tax cut expires, dates often nullified by Congress later. Economist Paul Krugman, author of "Fuzzy Math: An Essential Guide to the Bush Tax Plan," argues that if Congress eventually eliminates AMT and fails to honor the sunsets, what you get is a tax cut that'll be much more expensive than advertised and one that'll soak up the entire projected budget surplus.

Dr. PAUL KRUGMAN (Economist/Author; "Fuzzy Math: The Essential Guide to the Bush Tax Plan"): In the end, what they did was to sunset the whole legislation--that is, officially the entire tax cut expires on December 31st, 2010, which means that for the purposes of the accounting, they are assuming that in the year 2011, tax rates bounce right back up to their 2000 levels. So what they've done is they've actually managed to count only nine years of the cost of a 10-year tax cut. The estate tax doesn't get repealed until 2010, but then the legislation is sunsetted on December 31st, 2010. So if you are the son of a rich man and your father is ailing and he dies on December 30th, 2010, you inherit the estate tax-free. But if he hangs on until January 1st, 2011, half of the estate will be taxed away by the federal government.

BRANCACCIO: That is a narrow window of opportunity, if I can put it that way.

Dr. KRUGMAN: Well, I would say that it creates some interesting incentives. It gives the children of the wealthy who are--are near the edge a real incentive to pull the plug in the last weeks of 2010.

BRANCACCIO: But the real news there is that that's not much of a cut in the estate tax if the window is left that narrow.

Dr. KRUGMAN: Well, except the whole--the whole point of this legislation--the whole trick is to create a tax bill that is a mess. And the purpose, then, is to in future years, as we try to clean up the mess, the cleanup will always take the form of a further tax cut, so that the estate tax will, in fact, not be allowed to expire at the year--at the end of the year 2010. But there's a whole series of things in there that are essentially designed to create crises that will be met with a further tax cut. And so in the end, this is going to be a $ 2 1/2 trillion tax cut; not a $ 1.3 trillion.

BRANCACCIO: And it sounds like you're very persuaded this was not a set-it-and-forget-it tax cut. This is a tax cut that--it requires continual management.

Dr. KRUGMAN: Oh, it's set up so that almost every year, as we go along, people will say, 'My God, I thought I was getting a tax cut, but' and then discover that for some reason, it wasn't happening. And then they will write their senators and their congressmen, and the congressmen will agree to give those people a tax cut.

BRANCACCIO: Is that the case that the cuts at the more affluent end of the income spectrum are more assured than ones at the more modest end?

Dr. KRUGMAN: Yeah. I mean, aside from that estate tax thing, the--the next biggest thing is something called the alternative minimum tax, which is basically designed--well, it was designed to force--make sure there weren't any rich people ...(unintelligible) tax, but it has the effect that if you are very well off but not really rich, you're going to discover that you don't get any tax cut under the Bush plan; that if you're making $ 150,000 a year and you live in a high-tax state like New Jersey, you're going to discover that whoops, sorry, there's a tax cut but you have to end up paying the alternative minimum tax instead. Now that's going to become apparent, and they could have put in a fix for the AMT from the beginning, but that would have added around $ 400 billion to the cost of the tax plan. Now what they figure is that that will happen anyway, but if--they were able to claim that they were keeping the tax cut within bounds on the first pass. It's--it's amazing. In--in a way, you could almost say it's brilliant.

BRANCACCIO: Dr. Krugman, thank you. Princeton economist Paul Krugman is author of "Fuzzy Math: The Essential Guide to the Bush Tax Plan."

Originally broadcast, 5.29.01