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Sunday, March 13, 2005

AMT politics: The New York Times pretends it doesn't understand 

The New York Times would be a lot less annoying if it weren't so disingenuous in its unsigned editorials. It is one thing to advocate for a political point of view -- that's what editorials do. It is quite another thing to do so in a way calculated to set a political trap. That is what the Times does in this morning's editorial about the Alternative Minimum Tax (the "AMT"). Before we get to that, though, some background is in order.

The editorial, which describes a tax enacted in the Nixon administration as "Mr. Bush's Stealthy Tax Increase," basically argues that the Bush Administration's failure to amend the AMT operates as a tax increase on the "middle class". To reach this conclusion, the Times -- for perhaps the first time in its history -- defines "middle class" to include people making between $100,000 and $200,000 per year. One almost can't avoid wondering whether masthead editors at the Times earn between $100,000 and $200,000 per year.

In any case, this is a problem, the editors say, because
[n]ot only will many families that thought they were in for lower income taxes wind up feeling shortchanged, some will find that the Bush tax cuts have done nothing at all to cut their taxes.

Meanwhile, only a third of people earning over $1 million per year get whacked by the AMT, and the Times thinks that this is unfair.

Ignore, for a moment, the bizarre spectacle of the Times arguing for further cuts in income taxes. There are countless things that are just silly about the NYT's reasoning, first among them the point that the reason that many very high income taxpayers do not pay AMT is that their income comes from salaries and the exercise of non-qualified stock options, both of which trigger tax under the usual scheme at the top marginal rate of 35%, which is substantially higher than the top AMT rate of 28%. The AMT only bites if your deductions and certain income (gains from incentive stock option exercises, for example) are too large a proportion of your adjusted gross income under the personal income tax. The "rich" taxpayers that the Times is worried about are paying a substantially higher proportion of their income in federal taxes than the six-figure "middle class" taxpayers who will pay a couple of grand more under the AMT than the personal income tax.

Nevertheless, the Times is right that the AMT will trigger tax increases on a growing number of people who consider themselves middle class. This is because its brackets were not indexed to inflation when it was enacted by a Democratic Congress and the Nixon administration in 1969. People with relatively high deductions for state taxes and mortgages will find themselves paying higher total taxes under the AMT than under the personal income tax.

So why didn't the Bush Administration -- which never saw a tax cut it didn't like -- propose to amend the AMT? The Times says that to do so would reveal the fiscal folly in the tax cuts enacted in Bush's first term:
But Mr. Bush needs the alternative tax - he relies on its projected revenue to mask the debilitating cost of making his tax cuts permanent. Congressional estimates say that extending them permanently will cost $281 billion in 2014. But that estimate assumes that nothing will be done to prevent the alternative tax from further burdening the middle class. If the middle class is fully protected, the cost of extending the tax cuts will mushroom to $356 billion - 27 percent higher than the official estimate. The federal budget deficit would explode.

The Times then suggests indexing the AMT brackets to inflation -- which it argues would "restore the alternative tax to its true antisheltering purpose" -- and paying for that tax cut by increasing the rates on capital gains and dividend income.

Of course, the Times is transportingly disingenuous when it says that Bush did not amend the AMT because he is worried that the deficits will explode -- as the Times itself has relentlessly reminded us, the Bush administration does not care very much about deficits, and it loves tax cuts. The truth is, the Bush administration has not proposed amending the AMT because the Democrats will use any such proposal against Republicans in the next election.

As I have written before, there are a number of reasons why it is not in the interests of Republicans to amend the AMT.

First, the AMT is designed to nail affluent tax avoiders. Come the next election, the Democrats and their allied 527s will attack any Republican amendment of the AMT with all the deceptive advertising they can imagine. "Once again, the Republicans repealed a tax on people making more than $100,000 per year!" The NYT knows this, yet does not even acknowledge it in the editorial. Why? Because it would reveal the disingenuous game that it is playing -- it knows that if it can goad the Bush administration into proposing an amendment of the AMT, it will hand the left a choice campaign issue in 2006 and beyond.

Second, repeal of the AMT would have the effect of shifting wealth from low tax states -- which tend to vote Republican -- to high tax states which almost always vote for Democrats. Looked at this way, repeal or amendment of the AMT would make it easier for high tax states to raise their taxes even more. Repeal of the AMT would, in effect, subsidize "blue states" at the expense of "red states." The Times also knows this, yet did not acknowledge it in the editorial. Why? Because then the Times would have to explain why low tax "red" states should want to transfer wealth to high tax "blue" states.

The interplay between the AMT and the personal income tax certainly will result in some distributive injustice. Each tax scheme makes a certain amount of sense, but the two together are both confusing and unfair. The solution is to abolish either the AMT or the personal income tax, and then modify the surviving scheme to generate a just result. The only idea sillier than preserving the current dual taxation system -- which the Times proposes -- is proposing that the Republicans hang themselves by tweaking the AMT to benefit "middle class" taxpayers in the Northeast who earn between $100,000 and $200,000 per year.

8 Comments:

By Blogger Dave Schuler, at Sun Mar 13, 05:32:00 PM:

Debating who is and is not middle class is a neverending source of amusement. Congress's traditional answer to the question has been that anyone who makes up to and including a Congressman's salary is middle class and anyone who makes more isn't.

According to the Census Bureau the 80th percentile stood at around $88,000 in 2003. $100,000 to $200,000 appears to be a very odd definition of “middle”. Oh well, I guess where you sit depends on where you stand.  

By Blogger Spear Shaker, at Sun Mar 13, 10:17:00 PM:

For those of us in high cost, high tax, high deduction, and high wage states (CA), the AMT is an unpredictable, unplannable, confiscatory whack over the head...its stealth is un-American, and it needs to be reformed (indexed, reformed to relax its punishing of those who work for equity) to map to the realities of the modern workplace. It hammers the middle class here, and the Republicans' failure to tackle this grates on this right of center voter...  

By Blogger TigerHawk, at Mon Mar 14, 05:05:00 AM:

I live in New Jersey, so I feel your pain, Spear Shaker. My point is that either the AMT or the personal income tax need to be abolished, because the dual system is vastly more complicated than is even remotely necessary to insure that the rich pay their "fair share," as the Democrats always say. As a matter of politics, though, amendment or abolition of the AMT is a trap for Republicans, who will suffer far more at the hands of Democrats if they propose it than if they don't.  

By Anonymous BrooklynJon, at Thu Mar 17, 06:48:00 PM:

Hey, I have an idea. Let's replace the tax system with a flat tax with one bracket, or perhaps two very similar brackets (just so it's officially "progressive" to please the progressive types). Add in a standard, uniform deduction. Maybe allow a deduction of mortgage interest to encourage homeownership, and to prevent a total collapse of the real estate market. Get rid of all the other deductions. It's a simple, elegant, predictable system. Without all the deductions, marginal rates can be relatively low to encourage investment and productivity.
Rather than change abruptly, let's phase the system in slowly over time, so people can gradually get used to it and make rational decisions based on a predictable future. It's a great idea and it can work.

Oh, wait. That's what we have now with the AMT. Never mind.  

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