The AMT has provided cover for sleazy tax policy ever since it was enacted. It works like this: a politician promises a tax benefit. The tax benefit is written so that it doesn't work for AMT....Read the whole thing, including Joe's assurance that they can't repeal the AMT. Yeah, I pretty much knew that. So, go ahead, accuse me of writing "Why I love the new Democratic Congress!" just so I could condemn the Democratic Congress when they break their vow.
The politician gets to brag about a brave new loophole, and the taxpayers think he's a great guy, or gal. Then they complain about how that darn AMT got them. It's the ultimate bait-and-switch of tax policy.
This trick has been part of every major tax break in the last 20 years, and many of the minor ones. Perhaps the biggest example is the 2001 Bush tax cuts...
ADDED: Here's a NYT op-ed from 2005 about TurboTax and the AMT:
In a world without paid preparers and TurboTax, taxpayers would face the tedious process of calculating their taxes twice - once under the regular income tax and once using the cumbersome alternative minimum tax rules. But software does that calculation in the blink of an eye - and for taxpayers who have to pay the tax, tell them how to adjust their withholding so that next year they won't even notice that they're paying it....
We have created a vicious cycle. Congress has made taxes increasingly complicated and burdensome over the years. To cope, taxpayers have sought help from tax preparers and computer software. But that consumer convenience has bred inertia, shielding bad policy from the wrath of taxpayers who bear the burden of it.
AND: Here's an old post of mine, from 2005, before I started using TurboTax:
[It took me 20 minutes to figure] out my AMT, and Turbotax would have spared me from having to feel very bad about this, I suppose. I feel bad about the federal tax for having the AMT and bad about the state taxes for being so high in the first place and for being the reason I owe so much on the AMT.
Rationally, I admit that it isn't fair for people in states that charge high taxes to get away with contributing less to the federal effort. Why should people in low-taxing states, deprived of the benefits of the local services more taxes would fund, have to pay a larger portion of the costs of the federal government?
Rationally, I know my real problem should be with the state taxes, yet the feds are irking me with their complicated forms. In which case, I really ought to use Turbotax, not only to avoid the aggravation of witnessing the AMT grinding out the extra thousands, but so that I won't irrationally blame the federal government for doing something that is actually fair. Or am I losing my mind?
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21 comments:
If you're paying attention, the AMT isn't dishonest - it's the anvil to the government's tax collecting hammer - and has been since 1969. The AMT is integral to redistributing wealth, increasing the size and power of the federal government and shifting economic resources from the private to the public sector. Vote for politicians who argue for those, and you get the AMT. Live in a "blue state" with big, expensive state government, and you get screwed, er, affected by the AMT.
The ongoing existence of the AMT also gives lie to the Left's assertion that Bush's tax cuts were "for the rich," as the "rich" pay the AMT (which hasn't been cut).
The AMT hits squarely at the middle class. The one's who benefit most from the AMT are those who make a living off entitlements and support big government and socialism.
Wouldn’t that largely be the middle class? It seems to me that the bulk of government entitlement spending is for Medicare and Social Security (which largely go to middle and upper-income people) add to that K-12 and subsidies for post-secondary education and the majority of all non-defense/homeland security spending is for subsidies for the middle class.
The AMT hits squarely at the middle class. The one's who benefit most from the AMT are those who make a living off entitlements and support big government and socialism.
The rich, including most of our elected politicians, have 'people' who can exploit loopholes not available to those too busy earning a living and not making money.
The rich are eligible for the AMT. If the rich aren't paying the AMT, that's because they end up paying enough of a share of their income in regular income taxes to avoid the AMT. The AMT doesn't have loopholes. It's a very flat tax designed to ensure that people pay their "fair share" on their income and don't have too many loopholes and deductions.
The upper middle class pays the AMT because the mortgage deduction, the child credit deduction, and the deduction for state and local taxes combine to be a far bigger "loophole" as a percentage of income for the upper middle class.
As noted, the Bush tax cuts did not affect the AMT. Therefore, if they really were tax cuts for the rich, the rich were already not paying the AMT.
We left California and moved to a state, Arizona, with more friendly tax laws and lower cost of living. Many of our friends did the same thing and chose Nevada.
This demonstrates that the state and local tax deduction/loophole is responsible for much of the issue.
The ongoing existence of the AMT also gives lie to the Left's assertion that Bush's tax cuts were "for the rich," as the "rich" pay the AMT (which hasn't been cut).
Well, actually most of the super-rich don't pay the AMT, since it can be difficult to get enough deductions to drive one down into the AMT territory when you make tons of money. (There are a few, but at that point people end up doing stuff like renouncing citizenship.)
However, the business tax credit for small business owners and the state and local tax deductions, combined with mortgage deductions and child credit deductions, can make up enough of a percentage of income for the upper middle and lower upper class to get hit.
So on the one hand, the percentage of the Bush tax cuts that went to the super rich is probably higher than commonly estimated, though the percentage that went to the "merely rich" upper quintile is probably less than generally estimated. Also, to buy this you must accept that the common claim that the rich don't pay taxes is untrue.
This issue isn't being covered enough, and while today's conservatards are inherently corrupt thieves, no, I don't trust the Democrats to do the right thing in the absence of oversight, and that's what blogs are for.
Due to the MLK holiday, I don't expect your Senators and Representative to be available today, but I am expecting you to call them tomorrow and get (and blog) their statements.
Ann, I am glad to see you volunteer to take the lead on this with your blog. Let's make sure the Democrats do fix the AMT.
"This issue isn't being covered enough, and while today's conservatards(sic) are inherently corrupt thieves, no, I don't trust the Democrats to do the right thing in the absence of oversight, and that's what blogs are for."
Wow. If that's a "reality check," someone needs to perform their own reality check on their medicine cabinet and renew their prescriptions...
The AMT was popular when it was first proposed (of course then you had the example of some of the super-rich with good tax attorneys who were able to actually get payments from the government by way of loopholes.)
The mistake that was made then (and is catching up to us now) is that the AMT (unlike virtually everything else in our taxation system) was never indexed to inflation. So the cutoffs, which were reasonable at the time, have now in effect been reduced by the accumulated effect of decades of inflation.
As for the Democratic Congress and whether they will do something about it or not, just consider that last year the Republican Congress set a modern day record by only being in session for 104 days (including 101 legislative days). calendar here). For example, last January (as they had done several days in a row) the Republican leadership convened Congress for one day and immediately voted to take the next three weeks off. Of course this meant that at the end of the 109th Congress they hadn't even completed work on 9 or 11 spending bills from last year (Pelosi's Congress will take those up in February).
Of course those who want to bash the Democratic Congress will do so. For example, both parties will have their usual two day retreat-- the Republicans Thursday and Friday at the end of next week, the Democrats at the end of the following week. Of course when the retreats happen there is no quorum so Congress is not in session. But I predict that no one will pay any attention to the Republican retreat but during the Democratic retreat we will see more stories about how the Democrats are breaking their vow to actually work in Congress-- it's the way the right does things (don't forget how it was Pelosi who was attacked for giving in to a request made by Minority leader John Boehner to take a day off so Boehner could go see his Ohio State Buckeyes get the crap kicked out of them.)
The AMT was popular when it was first proposed (of course then you had the example of some of the super-rich with good tax attorneys who were able to actually get payments from the government by way of loopholes.)
The mistake that was made then (and is catching up to us now) is that the AMT (unlike virtually everything else in our taxation system) was never indexed to inflation. So the cutoffs, which were reasonable at the time, have now in effect been reduced by the accumulated effect of decades of inflation.
As for the Democratic Congress and whether they will do something about it or not, just consider that last year the Republican Congress set a modern day record by only being in session for 104 days (including 101 legislative days). calendar here). For example, last January (as they had done several days in a row) the Republican leadership convened Congress for one day and immediately voted to take the next three weeks off. Of course this meant that at the end of the 109th Congress they hadn't even completed work on 9 or 11 spending bills from last year (Pelosi's Congress will take those up in February).
Of course those who want to bash the Democratic Congress will do so. For example, both parties will have their usual two day retreat-- the Republicans Thursday and Friday at the end of next week, the Democrats at the end of the following week. Of course when the retreats happen there is no quorum so Congress is not in session. But I predict that no one will pay any attention to the Republican retreat but during the Democratic retreat we will see more stories about how the Democrats are breaking their vow to actually work in Congress-- it's the way the right does things (don't forget how it was Pelosi who was attacked for giving in to a request made by Minority leader John Boehner to take a day off so Boehner could go see his Ohio State Buckeyes get the crap kicked out of them.)
yetanotherjohn:
Maybe they don't have state income tax in Texas, but I lived there for a year, and I can tell you that the property taxes were through the roof. They also tried to charge me sixteen times as much to register a vehicle as I had paid to register the same vehicle in New Mexico. By that time I knew I would be moving to Arizona soon so I waited and registered it there (so sue me) for still a quarter of what it would have cost me in Texas.
So your suggestion that Texas keeps taxes under better control than other states only depends on your selectively choosing which tax you prefer to examine.
A better statement would be that they will get you anyway, one way or another.
Of course they can repeal. What's the worst that can happen? The deficit goes up?
So what.
Dick Cheney has already assured us that deficits don't matter. So if Republicans don't care about deficits when we have a Republican president at the helm, I fail to see why Democrats should care either.
Also the argument that the rich didn't benefit from the Bush tax cuts is disingenuous-- first, the AMT does not apply to corporate taxes, second it does not affect the lower tax rate on capital gains, and third it has no effect on inheritance taxes.
AMT or no, the degree of taxation is long past the confiscatory level, and has degraded into legalized robbery.
Once the income tax era arose at the turn of the 19th century, the US abandoned any pretense towards tax fairness. Once it's OK to tax one group more than another, there remains no standard by which to judge a tax fair or no.
As a result, the AMT becomes just another tax which was designed for one purpose but devolves into quite another once it is found to be such a success in raising revenue.
"Well, actually most of the super-rich don't pay the AMT, since it can be difficult to get enough deductions to drive one down into the AMT territory when you make tons of money."
Actually, no one has deductions like the "super-rich," so the deductions threshold you imagine is hardly operable here (except in the ever-so-statistically-marginal cases where a "super-rich" person has few declarable deductions.
"However, the business tax credit for small business owners and the state and local tax deductions, combined with mortgage deductions and child credit deductions, can make up enough of a percentage of income for the upper middle and lower upper class to get hit."
Businesses don't file for child or dependent credits; nor do they file for mortgage deductions. I think you've confused business and personal filing status.
"The mistake that was made then (and is catching up to us now) is that the AMT (unlike virtually everything else in our taxation system) was never indexed to inflation. So the cutoffs, which were reasonable at the time, have now in effect been reduced by the accumulated effect of decades of inflation."
This is absolutely correct.
"Also the argument that the rich didn't benefit from the Bush tax cuts is disingenuous-- first, the AMT does not apply to corporate taxes, second it does not affect the lower tax rate on capital gains, and third it has no effect on inheritance taxes."
Sorry, this isn't right. There absolutely is an AMT for corporate taxes; capital gains is different from income, generally speaking, as is inheritance, unless, of course, you favor double (or triple) taxation.
Bottom line: the bottom 40% of American earners do not pay federal income tax; the top 20% of earners pay approximately 80% of all federal income taxes; the top 1% of earners now pay more than 25% of all federal income taxes (who says the income tax doesn't redistribute wealth?!).
Also the argument that the rich didn't benefit from the Bush tax cuts is disingenuous-- first, the AMT does not apply to corporate taxes, second it does not affect the lower tax rate on capital gains, and third it has no effect on inheritance taxes.
The first two items on your list have nothing to do with "the rich". They affect investors -- and while most rich people are investors, the vast majority of investors aren't rich.
In any case, saying income tax cuts benefit "the rich" is a bit off, since "the rich" don't necessarily pay personal income tax at all. The tax cuts benefit people who earn a lot of money -- people who may or may not be rich, but who in any case pay virtually all of the income tax burden of the country. I've never had a lot of pity for leeches in the lower two income quintiles bitching about how a tax cut benefits people in the upper two.
For example, last January (as they had done several days in a row) the Republican leadership convened Congress for one day and immediately voted to take the next three weeks off. Of course this meant that at the end of the 109th Congress they hadn't even completed work on 9 or 11 spending bills from last year
Er, so the "benefit" we'll get from a Democratic Congress is that it'll spend money faster than the Republicans did?
Yay.
Businesses don't file for child or dependent credits; nor do they file for mortgage deductions. I think you've confused business and personal filing status.
I think you've misunderstood me. I was referring to people who take business-related tax deductions on their personal income taxes, which are then disallowed under the ATM. Plenty of individuals fall in this category.
Individuals who run a small business as an S Corporation do get taxed as income tax on their share of the profits (rather than the corporation paying corporate tax). Independent contractors and other self-employed people also have a host of business-related tax deductions.
These individuals get business deductions along with mortgage deductions, state and local tax deductions, and child credits and deductions. These are then disallowed under the ATM.
Do you disagree that such people take business deductions on their personal income taxes?
Actually, no one has deductions like the "super-rich," so the deductions threshold you imagine is hardly operable here (except in the ever-so-statistically-marginal cases where a "super-rich" person has few declarable deductions.
This statement does not agree with the facts. I find it hard to believe that a majority counts as a "ever-so-statistically-marginal case."
You may feel free to view the relevant CBO and IRS data, which demonstrates that far more households in the $200,000 to $500,000 income range (and recently, $100,000 to $200,000) income range pay the AMT than people making over $500,000 or over $1,000,000/year.
Yes, there are certainly people making over $500,000 who don't pay any income tax, and even don't do so with the AMT. The majority of them, however, do not have the kind of crazy deductions that lead to paying no tax or a tax lower than that imposed by the AMT.
However, it is incredibly easy for a $100,000 to $500,000 / year married couple in a high tax state with several children to hit that threshold right now, thanks to the lack of indexing for inflation.
By most definitions of income I would be considered rich (upper 2-5%}.Between the state and feds I will contribute approx. 40% of my gross income,in addition to social security,medicare,real estate,city and state sales taxes. Do I pay a fair share of my income in tax? My bracket pays a greater % of income tax revenues out of a dramatically expanding revenue stream than before the Bush tax cuts went into effect.
You won't really have a serious - peasants-with-pitchforks-and-burning-brands-chasing-congressman-down-the-street tax revolt in this country (as delightful as that would be) as long as paycheck tax witholding is in place.
Like that's going to happen.
And how, exactly, do cutting corporate income tax rates benefit the rich?
I suppose that you could argue that it boosts the value of their stocks and 401ks, but just about everybody has a 401K now.
And they get taxed on stock sales or dividend payments.
And how, exactly, do cutting corporate income tax rates benefit the rich?
Because everyone knows that corporations are run by evil rich people who just take all the extra money, throw it into their big Scrooge McDuck vault, and swim around in it. They certainly don't do anything like hire more workers to expand their businesses, or pay dividends to the shareholders, or anything like that.
John,
My apologies - I did misunderstand you, especially your reference to deductions for the "super-rich." Yes, those making more than $500K per annum are often outside of the AMT because, as the CBO paper you cite states, "the maximum 28 percent alternative tax rate keeps most taxpayers with the highest incomes off the AMT." As I now understand you, you meant someone at or above $500K having sufficient deductions to drive AGI back into the AMT range. I acknowledge your point.
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