From a New York Times editorial, 3/13/05:
http://www.nytimes.com/2005/03/13/opinion/13sun1.html
Mr. Bush's Stealthy Tax Increase
President Bush is presiding over a big middle-class tax hike.
As recently as 2000, only about one million taxpayers owed the
alternative minimum tax, created by a provision in the federal tax
code that is supposed to prevent multimillionaires from using
loopholes to avoid paying their fair share.
But by the time Americans file their 2005 taxes, some 3 million
taxpayers will owe the alternative tax and by 2010, nearly 30 million
taxpayers will be hit - among them, a staggering 94 percent of married
filers who have children and make $75,000 to $100,000.
Big families in high-tax states - New York, New Jersey, California and
Massachusetts - will bear the heaviest burden, largely because the
alternative tax increasingly disallows write-offs for dependents,
state income taxes and local property taxes.
On average, by 2010, people who make under $100,000 and owe the
alternative tax will pay an additional $1,321 in federal income taxes,
while alternative tax payers who make between $100,000 and $200,000
will owe an additional $2,592.
Meanwhile, and most outrageous, only 35 percent of taxpayers who earn
$1 million or more will owe the alternative tax.
•
Why does the alternative tax increasingly afflict middle-rung
taxpayers for whom it was never intended, while largely ignoring the
highest-end taxpayers it is meant for?
First, the alternative tax is not adjusted for inflation, so over
time, more and more middle-income taxpayers find themselves owing it.
Second, and crucially important, is the interplay of the alternative
tax and Mr. Bush's first-term tax cuts.
When the tax cuts were enacted, no long-term corresponding changes
were made to the alternative tax system - even though the
administration was well aware that was a recipe for disaster.
Not only will many families that thought they were in for lower income
taxes wind up feeling shortchanged, some will find that the Bush tax
cuts have done nothing at all to cut their taxes.
Here's why:
The alternative tax applies to people whose income tax bills are low
relative to their income.
So as tax cuts reduce the liability on a filer's Form 1040, the
alternative tax kicks in.
In effect, it claws back all or part of the supposed savings from the
Bush tax cuts.
By 2010, the Bush tax cuts alone will cause an additional 17 million
taxpayers to owe the alternative tax.
By 2014, assuming the Bush tax cuts are made permanent, 40 million
taxpayers will owe the alternative tax, nearly half of whom would
never have faced it but for the tax cuts.
Meanwhile, the people who should be paying the alternative tax do not.
Mr. Bush's administration, more than any other, has bestowed tax
breaks on wealthy investors in the form of superlow rates on capital
gains and dividends.
But the alternative tax system - which regards deductions for property
taxes or state income taxes as a kind of tax shelter - does not
recognize this preferential treatment of investment income.
That is a huge loophole.
The alternative tax, whose very purpose is to prevent excessive
sheltering, ignores the biggest tax breaks of all: special, low rates
on capital gains and dividends that allow investors to avoid paying
tens of billions of dollars in taxes every year.
Ever since the first round of Bush tax cuts were enacted, Congress has
passed temporary relief measures to keep most middle-income taxpayers
from owing the alternative tax, but the problem is becoming too big,
too fast, for stopgaps to keep working.
Mr. Bush, for his part, says that he wants to shield the middle class
from the alternative tax and that his tax reform commission will
recommend a solution when it makes its report in July.
•
But Mr. Bush needs the alternative tax - he relies on its projected
revenue to mask the debilitating cost of making his tax cuts
permanent.
Congressional estimates say that extending them permanently will cost
$281 billion in 2014.
But that estimate assumes that nothing will be done to prevent the
alternative tax from further burdening the middle class.
If the middle class is fully protected, the cost of extending the tax
cuts will mushroom to $356 billion - 27 percent higher than the
official estimate.
The federal budget deficit would explode.
The obvious answer is to restore the alternative tax to its true
antisheltering purpose, by making inflation adjustments that will
exempt the middle class once and for all and by fully taxing capital
gains and dividends under the alternative system.
But Congress and the administration are currently heading in precisely
the wrong direction.
The Bush tax breaks for investment income are scheduled to expire in
2008, but both the president and Congressional leaders are calling for
extending them, at least through 2010, while proposing no
corresponding long-term change in the alternative tax.
•
Bush administration officials and their antitax allies seem to believe
that if taxpayers become angry enough at having to pay the alternative
tax, they will throw their support behind any tax reform plan the
administration puts forth.
That is fomenting a crisis in order to appear to solve it.
Is it too much to ask not to put the country through that kind of
cynical exercise yet again?
_____________________________________________________________
Harry
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