April
29 2002, 8:45 a.m.
A
Bad Alternative
The
out-of-control AMT is punishing middle-class tax payers.
n January 17, 1969,
Democrat Lyndon Johnson's last Treasury Secretary, Joseph Barr, testified
before the Joint Economic Committee on the growth of tax expenditures.
In passing, he noted that 155 Americans with incomes above $200,000 in
1967 paid no federal income taxes that year. Twenty-one of them had incomes
above $1 million. The respective income thresholds would be $1.1 million
and $5.3 million in today's dollars.
The important point
Mr. Barr made was that what these people did was perfectly legal. They
weren't scofflaws or tax evaders. They simply took advantage of provisions
that allowed them to reduce their taxable income by arranging their affairs
appropriately.
Predictably, there was outrage at very rich people legally paying no taxes.
Under political pressure, Republican Richard Nixon signed the Tax Reform
Act of 1969 to address this problem. Among the features of this legislation
were an increase in the capital-gains tax and the institution of a minimum
tax, designed to ensure that all wealthy persons paid some income taxes,
no matter how many deductions, exclusions, and exemptions they might have.
This initial effort to tax the rich did not work very well. Within a few
years, Congress had to pass further legislation to restrict tax loopholes
it missed in 1969. Another Republican president, Gerald Ford, signed it
into law.
Among the provisions of the Tax Reform Act of 1976 was one requiring the
Treasury Department to produce regular data on the number of rich people
— defined as those earning more than $200,000 per year — that
paid no income taxes. In 1977, it found 60 Americans falling into this
category.
Despite the existence of a minimum tax, the number of wealthy Americans
legally avoiding all income taxes rose sharply. By 1986, 659 of them managed
to do so. This led Congress to toughen the minimum tax significantly.
Now called the Alternative Minimum Tax (AMT), it required millions of
Americans to calculate their taxes two ways: first the normal way, and
then again without many so-called tax preferences, such as the personal
exemption and deduction for state and local taxes.
The threshold for the AMT was relatively high at $40,000 for couples and
the rate was a flat 20%. After calculating one's taxes both ways, people
paid whichever was higher. In 1987, only 140,000 actually owed AMT and
the net revenue raised was just $1.7 billion.
Despite the new, tougher minimum tax, the number of Americans paying no
income taxes rose. In 1987, it climbed to 857 and has continued to rise
more or less continuously since. In 1998, the latest year available, 1,467
Americans with incomes above $200,000 paid no federal income taxes. This
was principally due to business losses and receipt of tax-exempt interest
on municipal bonds.
It should be noted that the Treasury taxes business income up to 40%,
so it is hardly unfair for it to share the losses, too. Also, those buying
municipal bonds pay a large implicit tax by getting lower interest rates.
Lately, municipal bonds have been paying about 5.14% versus 6.7% on corporate
bonds. This means that municipal-bond buyers are actually paying a tax
of 23%, which accrues to local governments in the form of lower borrowing
costs.
The problem is that because the AMT threshold has not grown as fast as
incomes, more and more people now have to pay it. Although the threshold
increased to $45,000 in 1990, it should be closer to $65,000 just to keep
pace with inflation. To also compensate for real income growth, it would
have to rise to $76,000.
Furthermore, many of the preferences that are lost in the AMT calculation
have risen. The personal exemption has grown from $1,080 in 1986 to $3,000
today. State and local taxes have also gone up. Yet the AMT continues
to treat higher taxes paid to state and local governments as some kind
of tax loophole,
punishing those who live in high-tax states like New York.
The result is that the number of those paying the AMT is rising rapidly.
By 2011, the number will reach 16.4 million, according to the Joint Committee
on Taxation, unless legislative action is taken. Moreover, more than half
of all AMT revenue will come from taxpayers with incomes below $200,000.
In short, the AMT is becoming a tax on the middle class, rather than the
rich. Indeed, this is the history of all tax-the-rich schemes. The rich
figure out how to get around them and the middle class can't. The result
is that the latter end up paying taxes designed for the former. That is
why it is in the interest of the middle class to support reductions in
tax rates on the wealthy. Though they may not benefit immediately, it
puts a cap on what they and their children ultimately can pay.
— Mr.
Bartlett is senior fellow at the National Center for Policy Analysis
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n January 17, 1969,
Democrat Lyndon Johnson's last Treasury Secretary, Joseph Barr, testified
before the Joint Economic Committee on the growth of tax expenditures.
In passing, he noted that 155 Americans with incomes above $200,000 in
1967 paid no federal income taxes that year. Twenty-one of them had incomes
above $1 million. The respective income thresholds would be $1.1 million
and $5.3 million in today's dollars.
