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Reagan and bush pushed amt to middle class { March 4 2007 } Original Source Link: (May no longer be active)
http://www.nytimes.com/2007/03/04/weekinreview/04johnston.htmlhttp://www.nytimes.com/2007/03/04/weekinreview/04johnston.html
March 4, 2007
Stealth Wealth
The Untaxed Rich, Found and Then Lost
By DAVID CAY JOHNSTON
FALSE advertising is part of the problem, and it’s right there in the name: alternative minimum tax.
“Minimum,” when the tax was conceived, meant that even the wealthiest Americans, with their buffet of deductions, loopholes and shelters, would still pay some income tax.
“Alternative,” added to the name of the tax 21 years ago, suggests a choice, but it’s not much of one for one in four taxpayers this year who must pay using this calculation unless Congress comes up with a different “alternative” when it takes up the matter this week.
What happened between 1969, when the minimum tax was born, and today, when it has few champions — and many people scratching their heads? And how could it be that a tax aimed squarely at rich investors who paid no income tax now hits middle-class families?
The ’69 version of the tax was more or less what it set out to be, right or wrong. And that was a remedy to the disclosure by the Johnson administration that 155 rich families some of whom made millions in 1966 had not paid any taxes — taxes that for other Americans were rising to pay for the Vietnam War. If deductions like the ones for owning oil wells and leasing rail cars had whittled some tax bills down to nothing, these rich earners would be required to pay something.
But in 1986, when President Ronald Reagan and both parties on Capitol Hill agreed to a major change in the tax system, the law was subtly changed to aim at a wholly different set of deductions, the ones that everyone gets, like the personal exemption, state and local taxes, the standard deduction, certain expenses like union dues and even some medical costs for the seriously ill. At the same time it removed and revised some of the exotic investment deductions. A law for untaxed rich investors was refocused on families who own their homes in high tax states.
Taxes are now calculated two ways — using the traditional income tax formula, and using the 1986 alternative tax formula — and taxpayers owe the higher of the two numbers. The majority of families with two or more children earning $75,000 to $500,000 now owe more under the alternative tax — anywhere from hundreds of dollars to tens of thousands of dollars annually. Among such families with an adjusted gross income of $75,000 to $100,000, almost 80 percent are affected, compared with just a third of those with incomes of $1 million or more, according to computer modeling studies by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute.
Repealing the alternative minimum tax would cost the government almost $70 billion this year, while putting everyone on the alternative and repealing the regular income tax would cost only $63 billion.
Simply removing personal tax exemptions and credits and indexing for inflation would reduce the number of taxpayers affected by 85 percent, the center estimated. That would retain the few, weakened provisions still in effect from the 1969 law intended to tax the rich.
For now, the only area of wide agreement is to keep enacting temporary patches until Congress and some future administration tackle fundamental changes in the tax code.
Regardless, until another course is chosen, a law focused on rich investors who paid little or no tax is now a law that affects 23.4 million of the nation’s 90 million taxpayers.
The story began on Jan. 17, 1969, three days before the Johnson administration was to end. Joseph W. Barr, who served only a few weeks as Treasury secretary, told a Congressional panel about the 155 families who paid no income tax, despite incomes of $1 million or more in today’s dollars.
Mr. Barr’s report made the front page of newspapers across the country the next morning and fueled debates in coffee shops, police stations and across kitchen tables. Congress in 1969 received more letters about these untaxed Americans than it did about Vietnam, according to Michael Graetz, a Yale Law School professor and tax adviser in the George H. W. Bush administration.
While the idea of paying your fair share as a moral issue may seem strange today, it was central to tax debates in that era. The disclosure that some of those who had gained the most by living in the United States did not share in the costs of the war infuriated many taxpayers.
But in 1986, when the ’69 remedy was fundamentally changed, there was virtually no news coverage because at the time the changes affected only a few people. The initial amount of deductions before the new alternative minimum tax kicked in was set so high that in the first year it raised only the $1.7 billion needed to plug a hole in President Reagan’s budget.
The alternative tax’s long-term effect was given no more consideration than, say, the exemptions on fuel-economy standards the government in the 1960s gave to sport utilities — vehicles that at the time were far less common and were used mostly for work that required hauling.
Since its inception, the alternative tax has raised more and more revenue each year, reducing the perennial federal budget deficits. Indeed, President Bush’s 2001 income tax cut plan was premised on taking back a third of the tax cut through increasing alternative minimum tax revenues.
Left unchanged, the alternative tax this year will take back about 27 percent of the Bush tax cuts, mostly from people making $75,000 to $500,000, the Tax Policy Center calculated. The center’s estimates are held in high regard by the administration and by administration critics.
Two major factors now push people into the alternative system. One is that the alternative tax rate of 21 percent in 1986 was raised in 1993 to rates of 26 and 28 percent, in tandem with the increased rates in the regular tax system that President Bill Clinton sponsored. This held the spread between the two systems steady, Professor Graetz said.
But when Mr. Bush sponsored his tax cuts in 2001, they applied only to the regular tax system, narrowing the spread and pushing many more people into the alternative system.
Because those on the alternative system cannot deduct state and local taxes, their marginal tax rates are often above 40 percent, a level many economists say is high enough to discourage earning more and to encourage cheating. Many of these taxpayers also lose the benefits of the lower capital gains and dividend rates that President Bush championed as tools for economic growth.
Professor Graetz says that a second factor is inflation, which has eroded the value of the exemption from the alternative tax, pushing millions of people into it. The dollar has lost more than 44 percent of its value since 1986.
Meanwhile the stated goal of the original tax is not being met under the successor tax enacted 21 years ago. A far greater number of well-off families still pay only small amounts of tax. More than 41,000 taxpayers with incomes of $200,000 or more in 2003, the last year for which figures are available, paid less than 10 percent of their income in individual income taxes. And the number of untaxed high-income families — once 155 — grew to 2,824.
Copyright 2007 The New York Times Company
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