In honor of American small business owners, like me, who get nailed on taxes, this brilliant Wall Street Journal editorial merits posting in its entirety… see quotes from Barbara Boxer and Chuck Schumer.
April 15, 2005; Page A10
Miracles happen, even to liberals, and the latest proof is their discovery of the horrors of the alternative minimum tax, or AMT. They’ve finally found a stealthy, soak-the-rich tax increase they don’t like — and, better yet on this annual tax-payment day, their revelation may make tax reform possible.
As our readers understand all too well, the AMT is a kind of IRS surprise double jeopardy. Claim too many deductions against a high income under the regular tax code, and the AMT sweeps you into its maw lest you pay too little tax. Less well known is that the AMT was created in 1969 amid one of Washington’s periodic class-warfare pandemics.
In the waning days of the LBJ Presidency, Joseph Barr became Treasury Secretary for all of 30 days on a recess appointment. On January 19, 1969, he created a political sensation by telling the Joint Economic Committee that, in 1967, 21 millionaires had managed to pay no income tax at all. This was deemed an outrage, and Congress spent the next decade designing federal tax policy in Quixote-like pursuit of those 21 millionaires.
The AMT was one result, and like many soak-the-rich schemes it captured only a small number of taxpayers at first. But because it wasn’t indexed for inflation, and because prosperity has lifted the incomes of so many Americans, the AMT has begun to pinch millions and now threatens the middle class. As the nearby chart shows, on present trend the AMT will hit an estimated 3.8 million taxpayers this year, 20.5 million in 2006, and 34 million by the end of this decade. By 2009, the AMT will collect more revenue than the regular income tax.
Especially, er, rich, is the fact that the AMT is biting hardest in the most liberal, high-tax states. That’s because the AMT doesn’t allow deductions for state and local taxes the way the regular code does. So middle-class taxpayers in New York, California and other states with high income-tax rates are getting hit sooner than people in, say, Florida or Wyoming. It is the ultimate blue-state tax.
This helps to explain why people who normally thrill to higher tax rates are suddenly up in arms. Liberal newspapers are now denouncing the AMT as a “tax increase” and blaming the White House for not doing more to stop it. “The AMT needs to be fixed,” moans Senator Barbara Boxer’s spokesman, in what has to be a tax-reform first. “We need to address the AMT, which is trickling down to catch more and more middle-class families in New York,” says Empire State Senator Chuck Schumer, another Saul on the road to Tarrytown.
We could ask why these Senators don’t merely call for lower taxes in their own states. But let’s be generous and congratulate the prodigal liberals for joining the broader cause of tax reform. There’s much they can contribute. For example, if stealth deduction phase-outs are offensive in the AMT, then surely liberals will also want to eliminate the PEP and Pease deduction and exemption phase-outs in the regular tax code.
Those hidden tax increases were passed as part of the Bush-Mitchell tax increase of 1991, and they raise marginal tax rates by about two percentage points for upper-middle-class earners. Both are set to begin expiring next year, thanks to the 2001 tax cut, but the same liberal editorialists who hate the AMT are now demanding that these provisions be retained. In the name of AMT consistency, now is the time for them to reconsider.
Many economists also believe that tax reformers could do worse than letting the AMT grow until it actually replaces the regular code. The AMT is a modified flat tax with lower rates (26%, and 28% on more than $175,000) than the current top marginal rate of 35% (or about 37% with PEP and Pease). It would have to be indexed for inflation, and its wicked complexity would have to be undone so it didn’t raise marginal rates for most Americans. But moving in the AMT’s direction of top marginal rates in the 20-percent range and fewer deductions is where useful reform will have to go.
As for the politics, the silver lining of the AMT is that it will drive blue-state Democrats into the tax reform debate later this year. Their own constituents will be demanding some relief. So far this year, Republicans are again proposing a temporary AMT fix that would spare some taxpayers from its clutches for another year or two. But maybe they should instead let this class-war Frankenstein continue to terrorize the liberal countryside until Democrats have no choice but to support major change when the President’s Tax Reform Commission reports in July.
Who knows, this entire AMT experience might even induce liberals to reconsider the wisdom of soak-the-rich tax policy. At least we can dream. Happy April 15th.