Saturday, November 11, 2006

Soaking the Rich and the AMT

Whenever I talk about taxes with liberals, there are always two questions I like to ask: How rich is rich? And how much is enough? It's the rare lefty who can give a real answer to either of these questions, largely because being specific would put them in a beartrap later on about taxes.

One issue that has been bothering me all year is the alternative minimum tax. Created in 1969, the AMT was designed to catch all those mean ol' rich people who were hiding their money in tax shelters. "In essence, the intention of the AMT is to set a minimum tax rate of about 27% on the highest earning tax payers so that they can not use loop holes or other tax reduction strategies to entirely avoid paying a substantial amount of income tax."

The problem is, it was never indexed for inflation. In other words, the income level for the AMT has never been changed, even though inflation has changed the value of income. A person making $15k in 1969 could live comfortably, but a person making $15k today would be struggling. The Congressional Budget Office puts it this way:

Over the coming decade, a growing number of taxpayers will become liable for the AMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability and nearly every married taxpayer with income between $100,000 and $500,000 will owe the alternative tax. Rather than affecting only high-income taxpayers who would otherwise pay no tax, the AMT has extended its reach to many upper-middle-income households. As an increasing number of taxpayers incur the AMT, pressures to reduce or eliminate the tax are likely to grow.

In a move that I actually approve of, the Democrats are planning to address the Alternative Minimum Tax problems.
Democratic leaders this week vowed to make the alternative minimum tax a centerpiece of next year's budget debate, saying the levy threatens to unfairly increase tax bills for millions of middle-class families by the end of the decade.

While I applaud the move by Democrats, I have to admit to a cynical smirk when I read this part of the article:
The focus on the AMT is hardly surprising, given that victims of the tax have been concentrated in high-cost urban areas such as Washington, New York and San Francisco -- places that tend to vote Democratic. Rangel, Hoyer and Nancy Pelosi (D-Calif.), the presumptive House speaker, all represent states hit hard by the AMT, which is sometimes called the "blue-state tax." To map states with the highest concentrations of AMT taxpayers is to draw bull's-eyes over California and the Northeastern seaboard.

Always good to see the altruistic motivations of politicians, isn't it?