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Sunday, February 25, 2007

Republicans Could Have Diffused the "AMT Bomb," But Didn't

Linda Beale of ataxingmanner takes on a recent Wall Street Journal editorial on "Bill Clinton's AMT Bomb":

Wall Street Journal AMT Editorial, by Linda Beale: The Wall Street Journal is an important source of financial news, but people should not expect to read its editorial page without their spin antennae turned on. Today's editorial on the AMT is a good example of the way the Journal does partisan (and misleading) spin. It's titled "Bill Clinton's AMT Bomb," Wall Street Journal, Feb. 23, 2007...

What's wrong with it?

First, it lays the continuing downward creep of the AMT at Clinton's feet, in spite of the fact that the AMT downward creep is directly related to two things--the lack of indexation (which has not yet been passed by any Congress or pushed by any president) and the nature of the Bush tax cuts (they lowered top rates for the regular tax so much that it made many more taxpayers subject to the AMT, and they intentionally did not lower the AMT rates).

The Journal blames Clinton for the AMT because the Clinton administration did the sensible thing--when top rates were raised, the AMT rates were raised as well so that the AMT could continue to function parallel to the regular system the way it was intended to. (Clinton also increased the AMT exemption--permanently, unlike the Bush Congress.) If the Bush administration had applied the same logic that the Clinton administration applied, it would have lowered the AMT rates (and again increased the exemption permanently, because of inflation) when it lowered the regular tax rates, so that the AMT would have continued to function parallel to the regular system in the way it was intended to.

That would have prevented any problem of the AMT slipping down into the middle class other than from the lack of indexation (which nobody has yet really dealt with). But that would have also forced the Bush administration to acknowledge that the Bush tax cuts were far deeper revenue reductions (and far more beneficial to wealthy Americans) than it apparently wanted to admit. So it didn't do the aboveboard thing and instead decided to argue that it could take care of the AMT later.....

Second, the Journal blames Clinton for not indexing the AMT exemption to inflation. That's like the pot calling the kettle black. At some point, someone should decide just how far down the AMT is targeted, set the exemption appropriately, and then index it for inflation. But the Bush Congress didn't do anything but a year-by-year "fix" to the exemption amount, and even then only when it was pushed to do so. Why does the Bush-supporting and Clinton-bashing Journal pick out the failure of the 1993 changes to index the amount as the time it didn't get indexed, instead of the 2001, 2003, and other changes during the Bush administration?

Third, it suggests that "average middle-class families" got about a $2000 per family deduction from the Bush tax cuts. That's a misuse of averages...

Fourth, the Journal calls the AMT a "liberal monster that was created in the name of soaking the rich but has now come back to swallow the middle class." Again, another liberal-bashing spin. The AMT was never intended to "soak the rich"--unless (like the Wall Street Journal, apparently) you happen to think that having wealthy people pay at least some small percentage of their income in tax every year is "soaking" them. The AMT was originally meant to make sure that very rich people couldn't arrange the type and timing of income in such a way as to pay no tax at all, and over time Congress saw that it also provided a way to ensure that people with considerable income couldn't over-use various incentives built into the tax system (certain kinds of tax exempt income, ability to defer wage income received in the form of stock option grants, etc.) that, taken in the aggregate, left them paying almost no tax. In other words, the AMT does fairly well the purpose for which it has been intended for decades, ever since Congress specifically enlarged its scope beyond just getting the rich who weren't paying any regular tax at all. (It would do even better in achieving its purpose if the capital gains preferential rate were again made an AMT preference.) ...

Just a note. The Journal sarcastically refers to proposals to raise taxes on CEOs in order to pay for adjusting the AMT to protect the (true) middle class. (Those officers ..., remember, average about 400 times the annual income of workers in their companies.) But the same editorial board thought it was completely reasonable for businesses (and a lot of them not so small) to receive even more tax cuts ... in return for their cost to implement a tiny, long-delayed, and much needed increase in the minimum wage (which in too many cases was zero, since state wage laws or local markets already require wages over the proposed minimum). It illustrates a point I've made several times... When one talks about taxes and money, changes will almost always be redistributive, but the directionality is what matters. Redistribution upwards, in fact, is the norm, as in the home mortgage interest deduction and many other tax expenditures in the Code that favor those in the higher income brackets, though most who support those kinds of changes talk a lot about the "free" market. Redistribution downwards, in favor of those who don't have much, is hard to do in an economy that is so dominated by huge multinational enterprises with enormous power and in which populist and progressive sentiments are often treated as naive and sentimental.

For a good review of the AMT issues, you can also turn to the February 22, 2007 entry "White House May Be Negotiating With Itself on Alternative Minimum Tax," on Talking Taxes, the tax blog connected with Citizens for Tax Justice. (Regrettably, these entries are all set to the general URL for the blog, so after today you'll have to go to the right hand column and click on the title to pull up this entry directly.) ...

    Posted by on Sunday, February 25, 2007 at 10:06 AM in Economics, Politics, Taxes | Permalink  TrackBack (0)  Comments (16)

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