Rich Man's Tax' Goes Middle Class

They have time to investigate steriods in baseball and debate the definition of torture, but ask them to represent their constituents on an issue that directly affects them and the Senate goes silent.

From Investors Business Daily:
Posted 12/14/2005

Fiscal Policy: Senate leaders now say they likely won't do anything about the alternative minimum tax this year. There may be good reasons for that. But if they let it slide too long, they risk a major taxpayer revolt.
Speaking to reporters Tuesday, Majority Leader Bill Frist said "in all likelihood" the Senate wouldn't be able to conclude a deal with the House to cut $30 billion from the alternative minimum tax, or AMT.

Before you tune out, understand this: The AMT, originally intended as a kind of tax-code punishment for a handful of millionaires who didn't pay any taxes, now hits many people in the middle class. In the next few years, it will hit millions more Americans.

William Beach, the Heritage Foundation's top numbers cruncher, recently recalled that he once asked former Sen. Bob Packwood how many people he thought it would affect. Packwood's answer was simple: not more than 150, all fat cats who had used clever tax accounting and various loopholes.

Thanks to bracket creep from inflation and an insatiable appetite for tax revenues (which keep the government from really fixing the problem), more and more people are pushed into the AMT zone.
This year, 3.4 million Americans will have to pay the AMT; next year, the number will soar to 18 million. By 2010, nearly 30 million Americans will pay the "rich man's tax."



That's Washington in a nutshell: A tax that was created by Democrats in the 1970s to snare a handful of millionaires ends up hammering millions of struggling middle-class taxpayers — the very people Democrats now claim to represent. Today, even people earning as little as $30,000 to $50,000 get hit.

Apart from the obvious unfairness of the AMT, there are some big economic and political problems with all this.

The main economic problem is that AMT filers generally pay higher tax rates than other people. Their general rates are 26% and 28% — compared with an effective tax rate of less than 20% for other filers. Many if not most of those affected are small-business owners. So the AMT will work as a tax on enterprise, entrepreneurialism and job creation — just what you don't want a tax to do.

According to Beach's calculations, 1.9 million small businesses will pay the tax this year; that will surge to 6 million in 2006. Small businesses account for most of the job growth in this country.
Firms with bigger tax bills will hire fewer workers and invest less in their own businesses. It's an economic hit we can ill afford.

The AMT is growing so fast that it will soon be the largest source of income tax in the code. By 2008, it will be less costly to repeal the regular income tax than to get rid of the AMT. As economist Alan Reynolds has noted, the AMT will raise an extra $104.5 billion in 2010; repealing the income tax for all other taxpayers would amount to just $57.8 billion.

Enough of this craziness. The Senate is apparently wringing its hands over Washington's version of "Sophie's Choice": Do we reform the out-of-control AMT or keep rates low on capital gains? That's the big debate right now.

In our opinion, the economy that's now growing so powerfully is a case for doing both. Each would stimulate future growth.

2006 is an election year. Leaving the AMT as is will do only one thing: anger millions of voters. Maybe that will get our representatives' attention, even if the economic justifications don't.