Franklin Countys First News

Target Rich Environment: Taxing the rich

John Frary

John Frary

In 2006 Len Burman, a director at the Brookings Institution, told the House Ways and Means Committee that "The AMT violates virtually every principle of tax policy. It is not fair: it penalizes married couples [and] includes nasty bracket creep."

On Jan. 9, 2012 the National Taxpayer Advocate (NTA) delivered her annual report to Congress, including legislative recommendations for mitigating taxpayer problems. Here’s the summary of her assessment of the Alternative Minimum Tax:

As our Annual Report went to press on Dec. 31, it appeared an agreement has been reached to patch the Alternative Minimum Tax (AMT). For taxpayers and the IRS, that is good news.

However, even if a permanent patch is enacted, the AMT is still extremely burdensome for taxpayers, and will continue to affect many middle and upper-middle income taxpayers, who presumably were not its intended target. At the same time, the AMT does not affect many wealthy taxpayers, who still manage to pay no income tax. One projection estimated that about 7,000 millionaires reportedly paid no income tax in 2011.

Taxpayers spent about 18 million hours for the 2000 tax year (the most recent year for which we found data) completing and filling out AMT tax forms and determining whether they owed the tax. The AMT requires millions of taxpayers to essentially compute their tax liabilities twice – once under the regular tax rules and once again under the AMT rules – and then pay the higher of the two tax amounts.

The National Taxpayer Advocate reiterates her longstanding recommendation that the individual AMT be repealed.

The AMT does not achieve its original purpose. Many middle and upper-middle class taxpayers pay the AMT, while most wealthy taxpayers do not, and thousands of millionaires pay no income tax at all. At the same time, the AMT adds significant complexity to tax computations, requiring millions of taxpayers essentially to compute their tax liabilities twice – once under the regular tax rules and again under the AMT rules – and then to pay the higher of the two tax amounts.

The key sentence: “The AMT does not achieve its original purpose.” The key phrase: “...reiterates her longstanding recommendation...”

So why has the AMT endured? The question is easily answered. The Congressional Budget Office estimates that its repeal would deplete federal revenues by $800 million over the next decade. In 2006 the Democrats adopted "pay as you go" budget rules that say any tax cut must be offset either by other tax increases or by entitlement spending cuts. Democrats are incapable of cutting spending. Most Republicans shy away from cutting in practice, although all favor it in theory.

The Democratic Congress created this special tax provision in 1969 after a second-tier Treasury official in the outgoing Johnson Administration revealed that 21 millionaires had paid no tax in the previous year. It aimed to ensure that all taxpayers, no matter how many deductions they could legally claim, would pay some federal income tax. The Democrats raised the AMT tax rate in 1993 from 24 percent to 26 percent and 28 percent as part of the Clinton tax increases. At that time the Joint Committee on Taxation estimated that only 2.6 million taxpayers faced a hike.

That 2.6 million was a pretty big jump for a tax originally inspired by 21 superfatted plutocrats, but no big problem. The projected number of victims was still a small fraction of the population. The numbers grew over the years owing to “bracket creep,” a process which jacked people into higher tax brackets through inflation. Tax revenues went up without any politician having to actually vote for a tax increase. Very nice for our political masters.

The Reagan Administration ended bracket creep for ordinary income taxes, but it remained in force for the AMT. So up it crept, year by year. In 2007, 27 million taxpayers faced an abrupt jump in their tax bills due to this “tax on the rich.” The number of taxpayers in Maine facing this surtax would have jumped from 12,987 to 85,000. Its unfairness and irrationality, as explained by the Brookings Institute and the NTA, were the same in 2005 or 2006 as they would be in 2007, but Maine’s congressional delegation only turned against it when faced with the prospective fury of 85,000 surprised and irate voters. All spoke up against it in 2006. Senator Snowe called it a “monster tax on middle Americans” and “a class tax that turned into a mass tax.” Senator Collins said “It’s a sneaky stealth tax. It is a backdoor tax that is applied to reduce the value of deductions.” Rep. Allen announced that “If we can’t do a permanent fix of this AMT this year than we have to do a one- or two-year patch until we can.... This affects too many tax-payers across the country for nothing to be done this year.” Rep. Michaud concurred “We have got to get a permanent way to fix this.”

And now, 5 years later, there’s no permanent fix (see above).

Maine has experienced a bracket creep problem all of its own. When the legislature introduced the income tax in 1969 it aimed to make the rich pay their “fair share.” It set a marginal rate of 6 percent on incomes over $50,000 (a 2008 equivalent of $290,476). Then bracket creep crept in and, before the 2010 Republican tax cuts, individuals with an income of $19,950 faced a marginal rate of 8.5 percent. How many voters making $3,100 in 1969 would have approved an income tax that hit them with a 8.5 percent marginal rate? That’s what $19,950 amounted to in 1969 dollars.

So here we are in 2012. Maine is back to normal with Democratic legislative majorities after a campaign primarily based on attacking the tactlessness, incivility, inhumanity, vileness, corruption, incompetence, and general baseness of the Blaine House Brute, secondarily by ranting against the “tax cuts for the rich” dozens of them voted for in 2010.

Senator Tom Saviello, our most reliable political weathervane, steps up with a bill to restore the marginal income tax on the rich. He estimates this will bring an additional $5 million in revenue. Wonderful! Our state faces an estimated $300 million budget hole and we can avert cruel and draconian cuts by extracting another $5 million from the rich?

Assuming Tom’s bill passes, LePage will veto it. The Democrats will leave it to the governor to try to fill the budget gap with cuts, and then attack him for his cruel insensitivity, all the while attacking him for his tax cuts for the rich.

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9 Responses »

  1. I admit that my recollection is hazy. But, the way I remember it, the AMT became much more of an issue when the dot com boom of the late nineties occurred and the concurrent and subsequent real estate bubble suddenly propelled many members of the middle class into paying a tax (the AMT) that many had previously never even heard of.
    When the bubbles burst, and the country wallowed in the recessionary trough, I assumed the burden of the AMT had been relieved for most.

    We all should pay taxes, regardless of income and be proud and happy to do it. I find myself more and more in favor of a flat tax, with no loopholes.

    If we abolished a standing army, and asked the NRA to gather up the various militias it endorses and that endorse it, to defend our country, we could easily balance the budget and begin paying down the Nations debt and simultaneously align the country back into the mold that so many assume to have been the intent of the founders.

  2. When Snowball was dropped on his young head,,,the first words out of his mouth must have been,,NRA!
    Some things just get stuck on people for life.

    Is there anything that isn't the fault of the,,,,well , you know who ??

  3. Has snowball ever read the costitution?

  4. I not only read it, I also learned how to spell it.

  5. Saviello's bill will have an effect in Maine proportional to Obama's federal "make the evil rich pay their fair share" bill: negligible. It's all about allowing more people to feel proud and happy about NOT paying taxes,

  6. Snowball does not need an accurate recollection. He needs to pay attention to the facts set before him. As the column plainly states, the AMT "political crisis" took place in 2006 when it became clear that our politicians would face a horde of infuriated taxpayers in the following year. The dot.com bubble burst at the end of the Clinton administration.

  7. Facts?
    Who cares about "facts"?
    Selective memory makes him feel right.

  8. Income taxation is a direct violation of the original language and intention of the U.S. Constitution. In Article I it says that the government can't directly tax the population without apportioning it back. The originators of the Constiution saw direct taxation as tyranny and I am also not in favor of income taxation, it is equivalent to serfdom and detrimental to social progress and the profit motive. I am very much in favor of consumer taxation though, it is an excellent way to allow thrifty individuals or people on a fixed income (retired, disabled) to control their expenses. Heavy consumer taxes are not particularly discouraging to those in society that are wealthy or short sighted. It is also an excellent way to tax the underground economy that the IRS can't touch. Look at it this way: the urban drug dealer making a half a million a year or even only a measely $100,000 will spend almost all of that money because they know better than anyone that it can be gone tomorrow and not one penny of that money would ever be collected through direct "legitimate" income taxation. Something else to consider: our country ran quite well from 1776 until 1916 with no income tax; there was no time of greater progress in history prior to the great capitalist era during the beginning of our great nations's history.

    I also think that one needs to resist the desire to over simplify the various maladies that have afflicted our nation; its much bigger than just indolence or guns or the defense budget or even the national debt.

  9. Gryphon - you're right on target that a consumption tax would not only be fair but would stimulate our economy to such an extent that our coffers would be overflowing with money.

    It takes some pensive thought but The FairTax.org would work.

    And as you say, it would enable the underground economy to share in our great country as well as possibly solve (or dent) the illegal immigrant issue.

    Primarily, our economy would boom, and businesses will be clamoring to come to America. In time there will be enough resources created and taxed to support many of the lefts benefits. Why they don't really want to do this, I don't understand.

    The shame of it, is that this is the time in our history for us to make this change for real hope !

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