Fundmastery Blog

Kurt Brouwer December 20th, 2007

Irony abounds in this seemingly boring tax-related story from the Los Angeles Times (emphasis added below). By way of background, the alternative minimum tax was passed in 1969 in order to hit 155 very wealthy taxpayers who were using tax-exempt bonds, tax shelters and other means to avoid paying taxes altogether. At the time it was passed, it was sold as a tax on the very rich in order to make them pay their ‘fair’ share. Now, nearly 40 years later, this tax has ballooned into a monster that hurts millions of taxpayers. So, it was ironic that a recent proposal to fix this problem was an echo of the original debate back in 1969. Read on:

House drops Democrats’ guidelines to pass minimum tax relief (Los Angeles Times, December 19, 2007, Noam N. Levey and Jonathan Peterson)

House lawmakers today agreed to spare more than 20 million taxpayers from the alternative minimum tax this year, bowing to Republican demands that the $50 billion in tax relief not be offset with any other tax increases. On the last day of legislative business this year, the House voted 352-64 to “patch” the so-called AMT, ensuring that millions of middle-class households — some with incomes as low as $75,000 — will be sheltered from the bite of the AMT.

The bill, which the Senate has already approved, is expected to be signed by the president.

Congress passed the AMT in 1969 to prevent the nation’s richest households from avoiding paying income taxes by claiming extensive deductions. But the measure was never adjusted for inflation.

As a result, its formula has forced up tax payments for a growing number of Americans, compelling Congress to step in repeatedly with short-term fixes.

In June, the Joint Committee on Taxation estimated that this year 81% of taxpayers with annual incomes between $100,000 and $200,000 and 49% of taxpayers with incomes between $75,000 and $100,000 would have been subject to higher taxes under the AMT.

Both parties agreed that middle-income taxpayers should be protected. The issue was always the cost.

Wednesday’s vote marked a significant defeat for congressional Democrats, who had fought to offset the lost revenue with taxes on a small group of very wealthy Americans…

…“What are our options?” asked House Ways and Means Committee Chairman Charles B. Rangel (D-N.Y.), who had pushed for legislation that did not add to the federal deficit.

“We could stick to our fiscal guns. We could say the right thing to do is not to pass a bill that’s not paid for,” Rangel said. “Or we could say, why hold 23 million taxpayers hostage because of the irresponsibility of the minority in not being willing to pay for this?”

One option of course would be to repeal the tax and then cut spending by an equivalent amount that the AMT brought in. That would be fiscally responsible. However, our political leaders apparently never considered such a revolutionary concept. The article continues:

…Unlike the standard income-tax calculation, which allows multiple deductions, the AMT calculation is designed to limit deductions. There are no deductions for children, for example, so families with many offspring lose a substantial tax break. The AMT also disallows deductions for state and local taxes, which play an important role in reducing taxes for residents in states, such as California, that have income taxes.

Taxpayers who meet certain income or deduction criteria must calculate how much income tax they owe under the standard method and also how much they would owe under the AMT method. Then they compare the two results and must pay whichever is greater.

Estimates of the number of taxpayers who will be spared the tax under the plan approved Wednesday vary considerably.

Under the legislation, most of the roughly 4 million taxpayers who paid the tax last year will pay it again. But without the patch, some estimates conclude that as many as five times that number of taxpayers could have been subject to the alternative minimum tax…’

It’s fascinating that this proposal to reduce the impact of AMT — which was created in 1969 to tax the very rich — was to add another tax on the very rich. Ironic, isn’t it? One 40-year-old bad idea is enough I think. Thank goodness this proposal has been defeated. Now, a little spending restraint would be nice too. But, we can only hope for so much.

Hat Tip: BrothersJuddBlog

• Economy , Geopolitics , Money , Personal Finance
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