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More On The AMT

The objection to my proposal to just let the AMT expand is, of course, that in a few years it will go from a tax afflicting "the wealthy" to one that will start taking a bite out of "the middle class." It's important to note here, however, that both political parties have, in recent years, been engaging in a major act of semantic realignment such that everyone below the top one or two percent of the income pyramid (and above some unspecified floor) is "middle class." Indeed, everything that benefits anyone below the 98th percentile is a "middle class measure." Thus, for example, we heard during the last campaign much discussion of the "middle class tax cuts" that were part of Bush's big tax cut package. It turns out, however, that a really huge portion of the benefits of the middle class tax cuts went to the "rich" top two percent. Another huge slice went to people in the 90th-98th percentiles. People who are, in other words, rich. So what will AMT expansion really do? William Gale, who supports reform, explains:

The AMT will be the de facto tax system for households with income between $100,000 and $500,000, 93 percent of whom will face the tax. It will encroach dramatically on the middle class, affecting 37 percent of households with income between $50,000 and $75,000 and 73 percent of households with income between $75,000 and $100,000 (compared to less than 3 percent for each group in 2002).
Now according to the Census Bureau's current population survey, 60 percent of households make less than $54,453. Thus, a measure that will affect "37 percent of households with income between $50,000 and $75,000" (with, presumably, most of those affected being closer to $75,000" is not exactly going to be a huge burden on the middle class defined as those in the middle 20 percent of the income distribution (i.e., households making between $34,000 and $54,453). The burden on the lower middle class will be zero. The primary burden of AMT creep will fall, in fact, on the rich. Not on the super-duper fly my private jet to Aspen for vacation rich. But the run of the mill ordinary newspaper editor / professor of tax policy / network news / US Senator / Hollywood screenwriter / successful lawyer rich.

This, or so it seems to me, is far from the most terrible thing in the world in light of the desperate need for more tax revenue. I would prefer, yes, for the system to be more progressive at the higher levels than this solution would allow. But at the same time, the notion that you can institute a robust liberal program at home purely by soaking the hyper-wealthy is a fantasy. It's a fantasy driven by political expediency, to be sure, so it's understandable. But given the actual situation, it's probably more politically expedient to work to not change the AMT than to actually implement a tax increase (it's easier to get away with doing nothing than with doing something). Liberals should remember that in Europe flat or regressive tax codes go hand in hand with social democracy and highly progressive expenditures.

February 12, 2005 | Permalink

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Matthew asks an interesting question that I would love to see the tax wonks address in terms that even I can understand But here's my... [Read More]

Tracked on Feb 12, 2005 1:46:25 PM

Comments

> in light of the desperate need for more
> tax revenue.

Right. Except at the moment we are experiencing the full force of a Norquist "starve the beast and drown it in the bathtub" regime. Who out there is willing to say we need more tax revenue?

Cranky

Posted by: Cranky Observer | Feb 12, 2005 1:09:16 PM

Just to state the obvious, you don't need increasing marginal tax rates to achieve a progressive or redistributive tax system. The former can be achieved with exemptions at the bottom of the income distribution, the latter depends entirely on the content of public spending.

Posted by: Marshall | Feb 12, 2005 1:20:01 PM

Sure but realize that you and your tap salary count as a "household" in figuring out the household inocome distribution. If you exclude the single young people and elderly fixed income households and look at actual married families with children, I think you'll find that a tax that kicks in at 50,000 bites pretty deep into any definition of the middle class.

Posted by: rd | Feb 12, 2005 1:51:32 PM

...the notion that you can institute a robust liberal program at home purely by soaking the hyper-wealthy is a fantasy...

If that's a fantasy, then what hope is there? Either you're soaking them or they are soaking you - otherwise how do they become hyper-wealthy on the first place?

Posted by: abb1 | Feb 12, 2005 2:02:39 PM

"Purely," abb1, the key word is "purely." You can soak 'em some, but if you really soke 'em a lot (as in, i.e., Sweden) then there are no hyper-wealthy people left. The money for programs needs to come from somebody, and that means upper middle class people.

RD: If I were making $50k in my single-guy household, I'd be a very happy camper indeed. I'll let you know when it happens.

Posted by: Matthew Yglesias | Feb 12, 2005 2:21:22 PM

but if you really soke 'em a lot (as in, i.e., Sweden) then there are no hyper-wealthy people left.

Yeah, right:

On Sunday, April 4, [2004] the Reuters news service published a story crediting IKEA founder Ingvar Kamprad with a fortune of more than $53 billion, exceeding Gates's $46.6 billion net worth.

No, taxes don't kill them, only stake through the heart.

If I were making $50k in my single-guy household, I'd be a very happy camper indeed.

Aren't you making around $10K/month just from ads on this blog? That's what I read somewhere last year...

Posted by: abb1 | Feb 12, 2005 2:36:41 PM

Right, that's exactly what I mean: You, like a lot of young singles and also like a lot of retired households, are not making anywhere close to 50K, yet you're counted as a household when calculating the distribution of household income. Thus, if you looked at actual married couples with children families, I bet the quintile income levels are higher, making the the AMT bite more deeply into what we would recognize as "middle class." Or, to put it briefly, the household quintile distribution doesn't just capture class differences, it captures portions of the population at different stages of their income life cycle. We wouldn't classify you as lower middle class because of what you make now: there's every
likelihood you'll make more as you age: writing books, getting hired by a large newspaper, bailing out for law school etc.

Posted by: rd | Feb 12, 2005 3:01:39 PM

I, too, doubt the likelihood of the automatic tax increase happening any time soon. OTOH, wouldn't it be fun to watch the intra-Republican bloodfest? Governing sure is hard.

Posted by: jsrutstein | Feb 12, 2005 3:09:50 PM

I, too, doubt the likelihood of the automatic tax increase happening any time soon. OTOH, wouldn't it be fun to watch the intra-Republican bloodfest? Governing sure is hard.

Posted by: jsrutstein | Feb 12, 2005 3:10:22 PM

Support for retaining the Alternative Minimum Tax would lead to the defeat of any Democratic or Republican legislator. Republicans understand, since they really really remember California. Do Democrats understand. The AMT must be set aside, for Democrats to think otherwise is madness.

"The AMT will be the de facto tax system for households with income between $100,000 and $500,000, 93 percent of whom will face the tax. It will encroach dramatically on the middle class, affecting 37 percent of households with income between $50,000 and $75,000 and 73 percent of households with income between $75,000 and $100,000 (compared to less than 3 percent for each group in 2002)."

Posted by: lise | Feb 12, 2005 4:11:32 PM

Try subjecting more than a third of married couples making 50,000 to the AMT, and go ask for votes. Please.... I would turn against any candidate who supported such a tax distortion.

Posted by: lise | Feb 12, 2005 4:16:20 PM

enlightenment please --

when they say "income" in this context, is that before any deductions or is it the amount you pay taxes on? there's a big difference.

Posted by: ej | Feb 12, 2005 5:16:52 PM

You've just achieved what I thought impossible, Matt. With my combined spouse/spouse income of 120,000, you've just turned me into a Republican.

Posted by: Nash | Feb 12, 2005 6:57:00 PM

In the UK "middle class" means rich (or "professional") people who are not titled. So Tony Blair is middle class. Even in the US, using the middle 20% of households as a definition of "middle" is disingenous. Are 40% "lower" and 40% "upper" class? Try more like 60% as a reasonable band for "middle".

On the main point at hand, the AMT is evil for American citizens who live and work abroad because it does not fall under double taxation treaties, so no matter how much tax you pay to your host country you can end up owing more to Uncle Sam. So if nothing else get rid of that stupidity.

Posted by: wab104 | Feb 12, 2005 7:27:10 PM

Matthew, Lise is right.

The AMT will cost us deductions on state taxes and interest on home mortgages. This is an impossible and absurd tax for middle class Americans, and the middle is broader than you would have it. Democrats must oppose the AMT.

Posted by: Ari | Feb 12, 2005 8:53:20 PM

I think Matt is right.

Leftists cannot raise enough money from the rich for a robust progressive economic policy. The top 1% (>$134,000) paid about $300 Billion in taxes (CY2000 data). Assuming one could double their taxes before they seriously considered reducing their income, one could raise and additional $300 Billion (not nearly enough is seems to me).

Doubling the taxes on the top 10% (>$100,000) would raise $800 Billion. Is that enough? Medicare, medicaid and the SS trust fund must be paid. Will there be anything left for generous new programs?

I think the taxes required will separate the true progressives form those who like to talk the talk as long as they don't have to pay the bills.

Posted by: Robert Brown | Feb 12, 2005 11:25:39 PM

"Liberals should remember that in Europe flat or regressive tax codes go hand in hand with social democracy and highly progressive expenditures."

Uh huh. In what countries?

Posted by: David Weman | Feb 13, 2005 4:54:43 AM

""Purely," abb1, the key word is "purely." You can soak 'em some, but if you really soke 'em a lot (as in, i.e., Sweden) then there are no hyper-wealthy people left. The money for programs needs to come from somebody, and that means upper middle class people."

So, Sweden doesn't have any money for programs. Matt, you're probably my favorite blogger, but you can be maddingly sloppy and lazy.

Posted by: David Weman | Feb 13, 2005 4:58:51 AM

Kamprad, as well as the hyper-wealthy Rausings moved from Sweden because of the high taxes in i believe the 70s.

Stefan Persson, owner of H&M is the richest Swede actually living in Sweden. Forbes says his net worth was 8.6 billion in 2004. That probably qualifies as hyper-wealthy since they say he's the 37th richest person in the world. (He "[e]njoys downhill skiing, tennis and golf")

Posted by: David Weman | Feb 13, 2005 5:25:11 AM

Matt is basically right, and I'm much too hard on him.

Our tax system, for example, is only mildly progressive. Persson pays more taxes than Gates, but a upper-middle class *and* a lower income person pays *much* more in taxes than their american counterparts.

You couldn't pay for a european-sized welfare state in the US by only raising taxes on millionaires.

Posted by: David Weman | Feb 13, 2005 5:54:58 AM

The US is essentially alone in taxing the ordinary income of its citizens living abroad and the AMT is a major mechanism for doing so. Here in Toronto I pay substantially more in taxes to the federal and provincial governments than I would in the States. I don't have a problem with that, as much of the increased tax goes for safety net social programs (including universal health care) that I support. However, it is easy to get resentful of US tax policies. Last year we had to pay back 10% of my wife's Canadian unemployment insurance benefits to the IRS as well as pay AMT on my income. This is on top of all of our Canadian taxes.

Posted by: Platypus | Feb 13, 2005 8:29:59 AM

Yeah, I don't understand how Americans can afford living in Europe.

Posted by: David Weman | Feb 13, 2005 8:56:49 AM

The problem with just letting the AMT expand is that it is a lousy idea to make major changes in tax policy by accident. Such changes should be explicitly debated and passed by elected representatives. If society thinks repealing the mortgage interest deduction is a good idea, fine--but it shouldn't be repealed unintentionally by stealth.

And let me point out a powerful reason why *liberals* should be particularly against the AMT. Right now, if you live in a state with relatively high income and local property taxes (e.g. a BLUE state) at least you get a significant deduction on your federal taxes. But AMT will gradually do away with that. Well-off individuals in high-tax blue states will be hit hardest and first, while well-off individuals in low-tax red states will be spared.

What's more, BLUE state taxpayers who lose the deductability of their high property and income taxes will likely become less and less supportive of those taxes. Bottom line -- AMT will hit blue staters harder than red-staters and, therefore, tend to turn blue-staters against state and local taxes.

Still in favor of the AMT?

Posted by: mw | Feb 13, 2005 9:40:17 AM

Frightening. I enjoy this blog and the excellent discussions here, but this is the kind of thinking that could send me squarely in to the Republican camp. My wife and I make $110K per year. We do very well on this, but we're not rich by any means. We have bills, a mortgage, and a future to save for. This idea that anybody who makes more than you do is rich and should be soaked is appalling. I'm all for a progressive tax system and social programs. I don't mind taxes -- they're the price you pay for the benefits of a civilized society, and I'm enjoying those benefits. The Bush tax cuts didn't do a lot for me -- I'd have much preferred they kept paying down the debt. But now I'm the enemy? It's my fault we have a bunch of greedy short-sighted bastards running the country?

Posted by: Scott | Feb 13, 2005 10:42:39 AM

Scott,

You are the problem progressives have to face. I don’t think they can raise taxes enough on the top 1%, say, of taxpayers to raise enough money for a robust, progressive agenda without driving them to take lower paying jobs or see fewer patients, ect.

Your income puts you in the top 10% of taxpayers (I think). So they are going to have to convince you to pay much higher taxes and accept a somewhat lower standard of living for the good of the collective. You hate Bush, like social programs, and say you don’t mind paying taxes; yet, when asked to pay more you are going to rebel (some would say you are “greedy, but I won’t).

Posted by: Robert Brown | Feb 13, 2005 11:15:16 AM

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