The Public Policy

Raising Taxes by Alternative Means

Liberal myths about the alternative minimum tax, the 2001 tax cuts, and the distribution of the income tax burden.

By 11.7.07

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Recently, liberal columnist Michael Kinsley chose an alternative route to attack the 2001 tax cuts...literally. In a Washington Post piece, he posed as provocative by using the least-loved of taxes, the alternative minimum tax, to lobby for a tax increase. In his desperate search for a tax increase, he managed to overlook facts about the alternative minimum tax, the 2001 tax cuts, and who shoulders the income tax burden currently.

The alternative minimum tax is just what its name states: a separate tax system designed to make all eligible taxpayers pay some amount of income tax. A truly alternative system, it was designed with separate tax rates, exemptions, credits, and its own broader definition of income. It also had little foresight, because it did not take into account inflation's effect. Its 2006 exemption for married couples was just $45,000 -- only slightly more than the $40,000 level of 1982, when the AMT as it now stands came into being.

That $45,000 is a far cry from the "affluent people" Kinsley admits the AMT was designed to affect. For that reason more and more people are discovering this alternative tax system. Its effect has grown from the few hundred intended targets in 1969, to a few thousand, to roughly four million people in 2005, and will grow to over 50 million in 2015.

Such is the strange creation Kinsley professes to endorse. In order to do so, he seeks to transform its warts into beauty marks.

First, Kinsley describes the process of calculating the AMT as "fairly simple." He includes a quote from the Congressional Budget Office that appears to support his assertion, only acknowledging in passing that "for others...CBO acknowledges that 'the process is more complicated.'" The report by the President's Advisory Panel on Federal Tax Reform, a bipartisan group tasked in 2005 with taking a serious look at tax reform, had a very different description for its complexity. "Millions of taxpayers must now fill out a 12-line worksheet, read 8 pages of instructions, and complete a 55-line form to determine whether they must pay the AMT...Not surprisingly...75 percent of AMT taxpayers hire a professional to do their returns for them." Simplicity itself.

Second, Kinsley dismisses those who would simply repeal the AMT. His desired course is to be paid for the revenue the AMT would otherwise collect. Of course, Kinsley is arguing from the standpoint of baseline budgeting, which makes sense only to those whose lives revolve around the Beltway, but makes none whatsoever to those who happily don't orbit D.C. The AMT's unintended effect has been blocked over the last decade by a series of so-called "patches," which increase the exemption level and allow individuals to make full use of certain personal credits. The President's Budget this year again includes just such a "patch" (in direct contradiction to Kinsley's assertion that "all the budgets of his presidency have assumed -- and spent -- the money the AMT raised") which would take the exemption level for married couples up to $63,350 (instead of its $45,000 statutory level) and allows full use of certain personal tax credits.

Thus we have in actuality an unintended and uncollected tax for which Kinsley wants compensation. And for the record, despite the extension of "the patch" legislation, which has vastly restricted the AMT's impact, the federal budget deficit was 1.9 percent of GDP last fiscal year and 1.2 percent this fiscal year -- both in the words of CBO "smaller than the average deficit of 2.3 percent of GDP recorded since 1966."

However, these inaccuracies are relatively minor when compared to Kinsley's whopper on its income class impact. "Although it no longer strikes only the very tippy-top incomes, it is still fairly progressive. Even in 2010, when the AMT will hit 20 percent of taxpayers if it isn't changed, more than half of AMT revenue will come from taxpayers reporting incomes of over $200,000."

That is pretty progressive...until we look at the distribution of income taxes paid under the current tax system. Again we can turn to the report of the President's Advisory Panel on Federal Tax Reform. Its distributional analysis of the regular income tax burden, using 2006 income estimates, shows those making $200,000 or more pay 53.5 percent of the income taxes now. Thus they are already paying at least the share Kinsley deems "pretty progressive" four years ahead of Kinsley's 2010 date. By 2010, with the combined effects of inflation and economic growth -- the very bane of the AMT, those currently making $200,000 will be making substantially more, which means the AMT's 2010 impact shifts down the income scale.

The current tax system's progressivity is a reality that Kinsley must avoid because recognizing it would mean also recognizing a fact that eviscerates his implicit purpose: the 2001 tax cuts made the tax code more progressive. According to Treasury analysis, the top 10 percent of income taxpayers in 2006 would pay 65.7 percent of the taxes with the 2001 tax cuts in place, compared to 63.6 percent without them.

This is something that Kinsley could not accept. His article juxtaposes the original AMT, which he says was "invented in 1969 as a way to collect at least something from affluent people" with the 2001 tax cut, which he describes as "Bush's tax cut for the affluent." What he imagines as justice would be to let the AMT mastiff off its leash to righteously devour the "affluent." The problem is this is not where the AMT would bite.

Once more the Tax Reform Panel's report gives us good guidance as it explicitly addresses Kinsley's proposal of letting the AMT replace the regular tax. "Relative to the current system, many middle-income taxpayers would face higher marginal tax rates, while lower- and very high-income taxpayers would face lower marginal tax rates." Nor is this the only problem with the AMT -- its stiff marriage penalty and failure to account for family size in determining exemption amounts, to name two more.

So focused is Kinsley in hitting the President's tax cuts that he ignores both the facts and the middle class. It is one thing to love something warts and all, it is entirely another to love all warts, like the AMT.

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About the Author

J.T. Young served in the Department of Treasury and the Office of Management and Budget from 2001 to 2004 and as a Congressional staff member from 1987 to 2000.