November 03, 2005
I'm worried about the Alternative Minimum Tax. I've been worried about it for a little while now, due largely in part to David Cay Johnston's excellent book, "Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich - and Cheat Everybody Else." The Alternative Minimum Tax (or the Stealth Tax, as Johnston is fond of calling it) is a tax that kicks in at a certain income level, that strips taxpayers of certain deductions to make sure that some taxes are paid. As smartmoney describes it, "the best way to understand the AMT is to view it as a separate tax system. It has its own set of rates and its own rules for deductions, which usually are less generous than the regular rules. Because of these confusing rules, the only ways you can tell if you owe the tax are by filling out the forms (essentially doing your taxes a second time) or by being audited by the Internal Revenue Service."
I've been worried that my parents might be hit with it, or - gulp! - possibly even me.
It looks like that might not be an issue any more. This CNN Money article explains that killing the Alternative Minimum Tax is at the top of the list for Bush's tax reform panel.
And this is a very, very bad thing.
See, currently, the AMT affects households that bring in $75,000 or more and have certain large deductions - that is, middle class families, especially those with "several children, interest deductions from second mortgages, capital gains, high state and local taxes, and incentive stock options." SmartMoney points out that "(w)hile only 19,000 people owed the AMT in 1970, over 3 million are paying it now, according to the IRS."
So what happened? I'll quote now from a 2004 interview with David Cay Johnston, who elaborates why the AMT was started, and how it's changed:
In 1969, it was revealed by the Johnson administration, three days before it ended, that 155 Americans who made the equivalent of a million dollars a year or more in today's dollars paid no income taxes. Remember, the U.S. government taxes you on your worldwide income to Americans. So nowhere in the world did the 155 people pay taxes. Congress got more letters about that that year than they did about the Vietnam War. It really struck home with people. So Congress passed a law that was designed to make sure that if you made the equivalent of a million dollars or more, you have to pay some taxes, because most people that make that pay a lot of tax.
Well, over the years, the laws morphed and were changed by Congress. And it largely ceased to be a tax on people who make more than a million dollars a year. But under the Bush tax cut, it will become a huge government moneymaker from the middle class and the upper middle class. Since 1986, under this law, if you take a lot of deductions, you lose your exemption for yourself and your spouse, and your children. You cannot deduct your state income taxes. You cannot deduct your property taxes on your home. If you or your spouse or one of your children is sick, and you're trying to keep them alive -- let's say they have cancer, and you're spending 10 percent of your income or more on your medical bills -- our government will tax you for trying to keep your loved one alive. You can even lose the standard deduction -- the most passive thing you can do as a taxpayer. You don't itemize; you just take the standard deduction. If you're a married couple with three children who made $75,000 last year, you lost part of your standard deduction to the alternative minimum tax or stealth tax.
The other part of this, again according to SmartMoney, is inflation - "while the 'regular' tax brackets, exemptions and standard deductions are adjusted annually for inflation, the AMT brackets and exemptions are not, so many people whose income has grown with the economy enter the dreaded AMT zone each year."
A few months ago, some politicians began carping about the alternative minimum tax, and how it's going to affect middle class families, and how "relief" is needed immediately. It looked like they were really going to move to prevent the AMT from hitting middle class families, which was a surprising and encouraging bit of news, and a change from the scenario that Johnston pointed out in 2004:
Now under the Bush tax cut, by the standards of President Bush, there is a one-half trillion dollar increase in alternative minimum taxes. And that money is explicitly being used to finance the reduction in taxes for people at the very top who make millions of dollars.
If the AMT were being shifted to place the burden back where it belongs - adjusting it for inflation, or resetting it to a meaningful threshold that returns it to its original intentions - then we might be seeing useful reform. Instead, the AMT has been degraded to a middle class family problem, so now the carping politicians and tax board can appear to be heroes by eliminating the AMT. Of course, in the process, they're effectively rolling back one of the few (if slightly ineffectual) defenses against tax evasion through creative accounting. And the AMT is completely taken off the table at a time when the current administration seeks further tax cuts at the top.
And this is where things get problematic. The mandate of Bush's reform panel is to be revenue-neutral - that is, any cuts they make have to be matched by increases elsewhere. The estimated cost of repealing the AMT is $1.3 trillion over the next decade. And I think we can be pretty sure that that revenue is not going to be made up by reinstating some of the taxes cut from the top.
I'd be surprised if this tax burden isn't reshifted to fall right back on the shoulders of the middle and lower classes.
Posted by starlen at November 3, 2005 11:18 AM
