January 14, 2007

No, Mickey, it's the money.

Mickey Kaus thinks the main objection people have to the Alternative Minimum Tax is the hassle of doing two calculations. I use TurboTax, which does the calculations automatically, and the AMT cost me $4900 last year. It's definitely the money!

And if you want to know why the AMT costs me so much, let me tell you it's a reason that Democrats should care about, because it's all about living in a blue state. The deductions I lose in the AMT calculation are -- as I wrote here -- are state and local taxes, like my incredible $12,000 property tax bill:
What the AMT does -- certainly in my case -- is to make sure that people who suffer from a really high state and local tax burden still pay their share of federal taxes. Getting rid of the AMT makes it easier for state and local government to maintain high taxes because these taxes will lower our federal taxes. Anyone in a state with low taxes should probably be pissed off at this, because their states do with less revenue while their citizens fork over more to the feds. But presumably those states vote Republican, so who cares? My state votes Democratic, and it's got a lot of people who could really save a lot -- and contribute generously to the Democrats who have tended to us so well.
Plus, they vowed to get rid of fix the AMT. I'm watching them closely on this one.

ADDED: Glenn Reynolds says: "[T]he hassle factor probably does matter some, and programs like Turbo Tax also make increased tax code complexity easier. Should conservatives hate those, too?" It depends on the conservatives. If they are in favor of simplicity, they shouldn't like a program that makes complexity feel like simplicity. But if they are in favor of benefiting red staters, they should love the way it mutes AMT outrage. I used to fill out the AMT form by hand, and it was.... vexing.

27 comments:

Anonymous said...

I'm watching them closely on this one.

I am glad to hear that. Tell me, when you, not just a constituent, but a Tenured Law Professor from their most famous State University call up your Senators and your Representative and you state your thoughts on this matter, what are they telling you about this back?

You have access baby!

Are your senators, is your representative for or against repealing/modifying the AMT?

I think you should continue to watch them on this, and you should make phone calls, write op-eds, and blog about that.

ASX said...

When did the Democrats vow to get rid of the AMT? The article you linked to from your other AMT post says that the vow to fix it, not get rid of it.

"Fixing the AMT has long been a top priority for Sen. Max Baucus..."

"Rep. Charles B. Rangel (D-N.Y.), ... this week put fixing the AMT at the top of his agenda..."

"Steny H. Hoyer (D-Md.), who is campaigning to keep his leadership post, said Democrats will make 'fixing the AMT . . . a priority of tax policy next year.'"

I didn't see anything in the article saying they "vow" to "get rid" of it. Is there some other source you can point to that shows Democrats vowing to get rid of the AMT?

John Thacker said...

"Fixing" in most contexts has been taken to mean "make it no longer apply to people making less than, say, $200,000-$300,000 and index it for inflation."

Currently it's not indexed for inflation at all (unlike the regular income tax), which is an obvious "fix" that's been delayed, and the reason why it's hitting the upper middle class instead of just the lower upper class.

Most of the states that benefit from this are high tax states, as you note. They're also high-income/high cost of living states. My understanding of the process is as follows:

Federal income tax rates are set at one rate, even though cost of living varies throughout the country. Someone making a comfortable middle class income in a poorer state tends to be taxed at the same rate as someone closer to poverty in a wealthier area. The deductions for state and local income taxes are used by the wealthier states to keep additional income in the state, where it gets redistributed to the poor people of the state (who are still middle class by federal yardsticks).

Of course, any state can raise their taxes in an attempt to keep more money home. It's much less effective for the poorer states, since they're deducting income paid at a presumably lower federal rate. (If it were a federal tax credit instead of a deduction, it would be a truly perverse incentive.)

One thing that the Republicans did was introduce an option to deduct local sales taxes instead of income taxes; people get a choice. Unsurprisingly, Republicans represent heavily several states without income taxes that get most of their income from sales taxes.

Svolich said...

I asked by rep (the intellectually gifted Loretta Sanchez) what they meant by "fixing" the AMT, she said they planned on indexing it to inflation. But since wages haven't been going up, it's not a priority, they can do it anytime in the next 8-10 years.

Anonymous said...

ASX - Indexing the AMT to inflation effectively eliminates paying the AMT for millions of Americans. I believe that is what Ann meant and what the Democrats promised.

Ann - $12K in property taxes! You must live in a palace.

Dave said...

12K in property taxes is nothing. Take a look at property taxes in the suburbs of NYC then get back to me about $12K property taxes.

Of course, if we would just kill public education then all this would be solved.

downtownlad said...

Actually, I think the Democrats are making great progress in fixing this monstrosity.

That's because we finally have some fiscal discipline in Washington after 6 years of Republican spendthrifts. And the Democrats are off to an amazing start on this front.

The Republicans abandoned their legislative duty to pass the vast majority of the appropriation bills for 2007. They punted them to the Democrats, assuming they could sabotage their agenda.

But they failed. The Democrats simply kept spending at 2006 levels. And the effects are the deficit are already starting to show. Spending for 2007 is only up 0.7% over last year and the deficit is thus lower than project. Republicans and conservative, who prefer to spend like crazy (prescription drugs, subsidies for Christian churches, etc.) are surely upset by this.

But it's good to have adults running the show again. And I should get a nice big tax cut out of it.

Boghie said...

Ann did not slam AMT enough...

It also quickly phases out the Mortgage Interest. It also phases out Charitable deductions. Finally, it phases out your personal exemptions and child credits.

The best thing about the AMT is that you go to your tax person on April 10th expecting to pay $200 bucks or something... Then he/she calls on April 13th and tells you to write a check for $15,000 and send it in quite promptly. Or use a credit card!!! And then withhold $1,200 each month in additional taxes from this point forward.

By the way, Headless Blogger, if you live in a state with a property tax rate of over 4% than the $12,000 maps to a home value of $300,000.

See how silly all this envy is...

Tim said...

Of course the AMT is unjust.

But so too are "progressive" income tax rates penalizing marginal increases in productivity.

But I support the AMT, because blue-state Democrats and other liberals should pay for the government, high taxes and wealth redistribution they advocate for the rest of us. Fair is fair, right?

Smilin' Jack said...

My state votes Democratic, and it's got a lot of people who could really save a lot -- and contribute generously to the Democrats who have tended to us so well.

But the people who save a lot aren't the ones who vote Democratic. People who vote Democratic are primarily those either too poor to pay taxes at all or too rich to care.

Yup, the Dems will "fix" the AMT--fix: to put in place permanently

Hey said...

Downtownlad: What brand of glue are you sniffing? It appears to be some really great Sh*t.

Since the Dems have been reminding us that they have only had 24 hours of power, and that their first spending bills will be for FY 2008 due to be passed by the fall, they have less than nothing to do with current deficit numbers. But then you wouldn't be an idiotic partisan shill if you noted this.

The repubs have been horrible on spending (yeah, we'll win if we spend like drunken kennedies), especially the President. It should have been easy to gut non-defence spending with the war as justification (there's your sacrifice right there, DKos), but they didn't. Instead of all guns and no butter, they went guns and butter, a horrible policy as LBJ and Nixon proved. However they have slowed down the growth in their spending recently, no thanks to the Dems.

downtownlad said...

Actually, the AMT isn't a bad tax. It's very much a flat tax. But the rate is too high. Eliminate the standard income tax, make everyone subject to AMT, and lower the rate to 17%. That would be a much better solution.

MadisonMan said...

Of course, if we would just kill public education then all this would be solved.

That's a very simplistic view.

I pay only $8K on my 1700-sq foot house. Of that, I believe about $3500 goes to the public schools. One thing that might help would be the cessation of unfunded mandates. If the Federal Government dictates that schools do something, why aren't they footing the bill?

Lou Minatti said...

I think the more important question to ask is: Isn't it time we eliminated the mortgage and state tax deductions? This is an enormous subsidy for people in "blue" states who pay too much for their homes, own second homes, and/or live in states with with high local taxes.

"This deduction is estimated to cost the U.S. Treasury some $63 billion in revenues as taxpayers claim some $337 billion in home mortgage interest deductions each year."

http://www.mortgagenewsdaily.com/10242005_Home_Mortgage_Interest_Deduction.asp

Those of us in "red" states with lower taxes and affordable housing do not meet the threshold and cannot get these deductions.

Why should homeowners in Texas or Georgia with decent $120k houses or apartment dwellers in San Francisco subsidize people who think it's rational to pay $600,000 for a 3-bedroom tract house in San Bernardino? Why should I subsidize someone's vacation house?

downtownlad said...

The Republicans slowed down their growth in spending????

Care to provide any evidence for that.

The Republicans abdicated their duty to actually pass any of the 2007 appropriation bills, except for a few - such as defense. Those that they did pass, i.e. defense, had huge increases.

They left it to the Democrats to pass the rest of the 2007 bills. The fiscal year for 2007 started last October. If the Democrats chose to increase spending by 4% for the fiscal year, and half of the fiscal year was already gone, then spending for the second half would go up by 8%. That's how it works. As fiscally responsible adults, the Democrats chose to FREEZE spending for fiscal year 2007 at 2006 levels. The Democrats get the credit for that.

Again - the Republicans "could" have gotten credit for fiscal year 2007 if they had actually chosen to do the same thing back in September - as was their responsible.

They didn't. They passed the buck. So sorry - the Rethuglicans can't take the credit for fiscal constraint when they had NOTHING to do with it.

Svolich said...

ATM also phases out legal fees and expenses.

http://www.cbsnews.com/stories/2004/01/12/eveningnews/main592779.shtml

(CBS) Cindy Spina should be one of the happiest people around.

She finally won a sexual harassment lawsuit against her employer. It took six long years.

"I was elated," says Spina. "I can't even describe how I felt - I felt so good."

She was awarded $1.5 million, including fees for her attorney.

But then, as CBS News Correspondent Lee Cowan reports, the IRS got involved.

"This is where it gets to be Alice in Wonderland time," says attorney Monica McFadden.

After legal expenses, Spina was left with $375,000.

But the IRS wanted $475,000 in taxes. So not only did she have to give up her entire award, but she owed the $100,000 tax bill.

"It felt like my victory was taken from me," says Spina.

And she is not alone.

"It's happening to every civil rights plaintiff that wins a lawsuit," says McFadden.

They are victims of a little known portion of the U.S. tax code called the Alternative Minimum Tax, or AMT.

It's no mistake, says David Cay Johnston, author of "Perfectly Legal."

"The Alternative Minimum Tax is like a parallel universe," says Johnston. "Think about a "Star Trek" episode - there's the world here, and then there's this parallel evil world over here."

Cindy was beamed into that world when, like any taxpayer, she thought she could write off the cost of her attorney. Under the AMT, though, everything that went to her attorney was counted as income.

"Everyone knows she doesn't get this income," says McFadden. "Congress knows, the courts know, I know, the defendants know, the world knows, but according to the IRS, it's her money."

The U.S. District Court in Chicago was sympathetic. The judge knew an award that size would automatically trigger the AMT, and in the end, would produce what even he called an "unjust result." But his hands were tied. If there were shortcomings in the law, he said, it was up to Congress to fix, not the courts.

That's the same argument even the IRS makes.

In fact, the IRS is expected to warn Congress this week that the AMT is the biggest problem facing American taxpayers.

"All along the system is an acknowledgement that this is broken, but we're not fixing it - we don't have the will yet to fix it, and it is in Congress' hands," says Nina Olsen, of the IRS.

And unless something changes, attorneys fear perfectly legitimate civil rights cases may never be brought because winning may leave clients worse off than losing.

"To have to say to this person, 'Guess what, you're going to get screwed, and I can't do a damn thing about it,' you feel powerless," says McFadden.

"It doesn't seem right, and it doesn't seem fair that you can win a victory and have to pay out of pocket," says Spina. "It doesn't seem like the American way."

It all leaves Spina wondering whether it would have been better to suffer her harassment in silence than to have gone to court and be stuck with a tax bill more than twice her income.

yetanotherjohn said...

Living in a state without a state income tax (though my property tax was also in 5 digits), the AMT doesn't affect me. Especially since I use a computer tax program, so the hassle factor is minimal. As far as Mickey's position, $20 will take care of the hassle.

But I think this does have a political principles issue. The democrats tend to feel that taxes are a good thing. We should be happy to pay taxes because of all the good they do. So if they are going to argue that they are taking to much money, then shouldn't that same logic be applied to any and all taxes?

Targeting tax cuts for $100K to $500K is hardly consistant with "proggressive tax" enthusiasts.

On the other hand, republican political principles would tend to favor tax cuts. Except in this case, what it would do is encourage the overall growth of government, especially at the state level. But isn't that also consistant with the republican political philosophy of moving government closer to the people. Taking money from the federal level so it is easier to raise at the state level should be consistant with the repuublicans. But as Anne points out, the state governments it helps out tend to be the state governments of the blue states.

Ahhh politics.

Anonymous said...

Boghie - No envy here, the palace comment was with tongue in cheek. I'd expect to see $12K on the suburban montrosities being built today, but am surprised that the modest urban home I see at this blog would be taxed that much.

I live in WI and own property in Madison. My mental computations based on photos of Ann's place tell me that she is being screwed on property taxes.

John Thacker said...

Again - the Republicans "could" have gotten credit for fiscal year 2007 if they had actually chosen to do the same thing back in September - as was their responsible.

Actually, that is what Republicans did. Not for especially noble reasons, if you care-- once the Democrats won Congress, the Dems immediately started pushing for extra spending on the 2007 fiscal year so that it wouldn't be counted as part of their "pay-go" promises for fiscal discipline. At the same time, Republican appropriators who had been fighting the budget hawks in the party suddenly decided to agree to keep spending at 2006 levels, for exactly the same reason-- to make the Democrats pay for any spending hikes under their promised paygo rules.

Now, the Democrats absolutely deserve some credit for so far sticking to their paygo promises and keeping 2007 spending at the same level, after the Republicans passed continuing resolutions to keep spending for the first half of 2007 the same as in 2006.

At the same time, it's absolutely true that the Democrats were wrangling for big spending increases as one of the last acts of the previous Congress, so that Republicans would get saddled with the responsibility and so that the paygo rules would be easier.

John Thacker said...

But since wages haven't been going up, it's not a priority, they can do it anytime in the next 8-10 years.

A big misconception here. Wages haven't been going up much after inflation. (Although they did in 2006 after a couple of flat years; wages tend to increase in the later part of recoveries in a business cycle, not the beginning.) However, since there still is inflation, that means that if the AMT isn't indexed to inflation people still suffer real tax increases. If inflation is 3% and you get a 3% raise, but the tax brackets aren't index, then you have the same salary after inflation but pay a higher rate on it.

If that's actually what Loretta Sanchez said, she really doesn't understand the issue.

downtownlad said...

John Thacker - If you seriously believe that spending would have been held to 2006 levels had the Republicans actually retained control of Congress - I have a bridge to sell you in Brooklyn.

Svolich said...

If that's actually what Loretta Sanchez said, she really doesn't understand the issue.

That's really what she said, and she really doesn't understand. That's why I wrote it that way.

There are some really, really bright people in Government. I worked some with Chris Cox, and I'd trust him to run anything from Toyota to Harvard. Sanchez I'd trust to run the local IHOP.

Anonymous said...

The Republicans abdicated their duty to actually pass any of the 2007 appropriation bills, except for a few - such as defense. Those that they did pass, i.e. defense, had huge increases.

I don't recall the Dem's submitting any spending bills or using any of the rules they abused when it came to denying votes on judges to attempt to force the R's to act on spending bills?

As for keeping spending flat and "saving money" - it's false savings. In the basic science research that the government funds the programs are taking huge hits, losing people (who will go to other countries and can't be replaced), and canceling research programs that may end up in those same countries and further erode any tech advantage that the U.S. has.

Both parties are at fault but right now the ball is in the Dem's court and they have chose to do nothing.

As for taxes - one has to wonder if the Dem's don't care about the opinion of the solid blue states. After all the voters there keep voting Democratic at all levels and accept the pain of high taxes. If they will accept it locally then why not hit everyone?

ed said...

Hmmmm.

@ downtownload

And the effects are the deficit are already starting to show.

Which Democrats have absolutely nothing to do with.

Spending for 2007 is only up 0.7% over last year and the deficit is thus lower than project.

And again the Democrats have absolutely nothing to do with how low the deficit is right now. In a year if that's true then we'll talk.

Republicans and conservative, who prefer to spend like crazy (prescription drugs, subsidies for Christian churches, etc.) are surely upset by this.

You mean the same conservatives who've been yelling at Republicans to cut spending the last 6 years?

As for "subsidies for Christian churches", why don't we discuss the billions in subsidies for lefty think tanks, programs and activist organizations why don't we? If you want to be a sanctimonious prig then I'm happy to play that game.

But it's good to have adults running the show again. And I should get a nice big tax cut out of it.

ROFLMAO!

Yeah, "adults". Did you see where the Senate Republicans forced the Senate Democrats to accept Nancy Pelosi's plan?

You're waiting for Democrats to give you a tax cut? Bloody long wait.

Don't hold your breath.

John Thacker said...

If you seriously believe that spending would have been held to 2006 levels had the Republicans actually retained control of Congress - I have a bridge to sell you in Brooklyn.

Downtownlad:

That would be why I wrote that the Republicans only agreed to do so after they lost control of Congress, and said that it was "not for especially noble reasons," yes. I'm sorry, I'm not particularly sure how to write that clearer, but yes, I obviously agree that the Republicans would not have held spending down without losing the election.

As I clearly said, the Republicans had two factions, one that wanted to hold spending down and one that wanted to increase it. They couldn't agree, and so no budget was passed. The Democrats, during this time, had some members agitating for higher spending and others who wished to act as the opposition so that no budget would be passed, in the hope that this would hurt the Republicans.

However, it's also true that during the entire 2000-2006 period, Congressional Democrats always voted for and agitated for higher federal spending. I'm certainly glad that they're sticking to their loud budget promises so far, but it's equally true that they have many members itching to increase spending heavily and after a few years will probably backslide and need tossing out too.

In the basic science research that the government funds the programs are taking huge hits, losing people (who will go to other countries and can't be replaced), and canceling research programs that may end up in those same countries and further erode any tech advantage that the U.S. has.

It's always tough to know how much to respect such claims, since you always hear cries of poverty. After all, the NSF budget went up massively in 2001, 2002, and 2003, 8% or more each year and then was essentially held completely steady in 2004 with inflation and actually declined in 2005 from 2004. (Although, to look at it one way, from a 2000 baseline 2005 was still higher.) The amount of complaining seemed relatively constant each year-- indeed, I knew plenty of people who endlessly denied that the NSF had had budget increases in those three years. It ends up being a little bit like the boy who cried wolf.

John Thacker said...

That's really what she said, and she really doesn't understand. That's why I wrote it that way.

Wow. I'm glad I took the time to read it once or twice and make sure it said that. At first, and this is probably my fault, I read it as though you were possibly agreeing with her ridiculous statement. I'm very glad to hear that you realized how inaccurate she was.

Not glad to hear that she's so ignorant of how inflation and taxes work, though.

Balfegor said...

But the people who save a lot aren't the ones who vote Democratic. People who vote Democratic are primarily those either too poor to pay taxes at all or too rich to care.

And, increasingly, yuppies and DINKs on low six figure salaries -- rich enough that they get hit by the AMT, but not so rich that they don't have to care about taxes.