Tuesday, May 31, 2005

The New York Times on the Alternative Minimum Tax 

It is broken record time. Yes, I'm back to writing about the Alternative Minimum Tax. If you don't care about the Alternative Minimum Tax, skip to the next post, which is much more interesting.

The New York Times is going after the AMT again, having modified its proposal of March 13. Then it described taxpayers earning between $100,000 and $200,000 as "middle class," a classification that may match the self-perception of those people but which is wholly at odds with the redistributional politics usually practiced at the Times. It has since scaled back its proposal for AMT reform to exempt taxpayers making less than $100,000, without (of course) admitting that it has changed its point of view, or explaining why.

But that's not why I'm irritated.

The Times thinks that the real atrocity is that there is "a special low rate on investment income" in the personal income tax, meaning by this that long-term capital gains and dividends are taxed at 15% regardless of bracket, whereas wages and other ordinary income are taxed at 35% in the top bracket.
Then, to fight excessive tax sheltering, Congress should close a gaping loophole in the law that allows wealthy investors to avoid paying the alternative tax on much of their investment income. Here's how the loophole works: The tax rate on investment income is typically much lower than the rate on wages and salary. For example, the tax on a $1,000 capital gain from the sale of stock generally comes to $150, while the tax on $1,000 of salary can be as high as $350. The special low rate on investment income allows investors to avoid paying tens of billions of dollars in taxes each year. And yet the alternative tax does not treat that super-low rate as a tax shelter. (emphasis added)

Never mind that the "super-low rate" that the Times describes is not a "loophole" at all -- it is out there in plain sight. If the lower rate for capital gains and dividends is a "loophole," so is the tax credit for having children or the deduction for state taxes. No, that is not what annoys me.

I am annoyed because capital gains and dividends are not, in fact, taxed at lower rates than wages. Rather, they are taxed at higher rates, because the underlying corporation has already paid corporate income tax at roughly 34% on its profits. When all is said and done, a $1 of corporate profit that is paid out in dividends to its stockholders is taxed at more than 43%, a rate substantially higher than wages. The Times, of course, knows this, but would prefer to describe this lower rate as "super-low" and a "loophole."

There are certainly principled arguments for reform of the AMT, and it may even make sense to exempt people who make less than $100,000 per year, as the Times proposes. But the editors would be a lot more persuasive if they weren't so unabashedly disingenuous when they write about tax policy.

We now return to regularly scheduled blogging.


By Anonymous Steve Bragg, at Tue May 31, 11:25:00 AM:

Keep talking about the AMT, TigerHawk, and don't be ashamed. If we don't watch the Times, and the people who unthinkingly accept its pronouncements, we could wake up to find the AMT used as a backdoor way to remove President Bush's tax cuts.


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