December 6, 2007

Alternative Minimum Tax: May We Make a Suggestion?

Hatched by Dafydd

The United States Senate appears to have hit an impasse on fixing the Alternative Minimum Tax (AMT), which lunges up out of its grave every year, skeletal hands clutching and grabbing, threatening to snatch thousands of extra dollars from average Americans' pockets:

A bill that would protect millions of middle-class taxpayers from being hit with a surprise tax increase over the next several months stalled in the Senate today, creating more confusion as filing season approaches.

The bill, intended to stop the alternative minimum tax from ensnaring more and more Americans, was supported by only 46 senators — 14 short of the 60 needed to shut off debate and move to a vote on the bill itself.

Anybody who has ever been gobsmacked by the AMT knows exactly what it is: It's an IRS punishment for falling into any one of number of obscure (but widespread) categories of taxpayer, including having too many children, living in a state with high state income taxes, or owning in whole or part an incorporated business, large or small -- such as a family farm or convenience store.

The AMT was first enacted in the Tax Reform Act of 1969, in a mean-spirited attempt to prevent rich people from taking advantage of the tax breaks that Congress itself had enacted or would enact in the future. "How dare you Bertie Woosters use completely legal means of sheltering your money from taxes!" exclaimed the 91st Congress, with its 57 to 43 Democratic majority in the Senate and its 243 to 192 (56% - 44%) Democratic majority in the House; "We'll just rescind your rights by setting an absolute minimum you must pay."

Under the AMT, if you fall into one of the dreaded categories, and if your income tax would otherwise be less than 26% of your adjusted gross income, then your tax is simply jacked up to 26% of the gross... and to hell with your legal right to declare expenses, exemptions, or deductions. (For some taxpayers, the magic number is an even bigger 28%.)

The AMT was originally touted as a way to sock it to millionaire "coupon-clippers," the "idle rich" who simply lived off of the interest from their investments (like Sen. Ted Kennedy, D-MA, 100%). But in a sneaky bit of legislative legerdemain, the Democratic 91st Congress accidentally forgot to index the AMT to inflation... so every year, more and more middle-income taxpayers find themselves subject to its significantly higher income-tax requirements:

For the 2006 tax year, nearly four million people were subject to the alternative minimum tax, including half of all taxpayers with incomes of $200,000 to $1 million, and 5 percent of taxpayers with incomes of $100,000 to $200,000. Without any change, the tax is expected to hit as many as 23 million taxpayers at an average cost of $2,000, reaching people with incomes as low as $30,000 to $50,000, depending on circumstances.

So what's gumming up the works? Easy to explain: The Democrats have made a solemn "pledge" of sorts, which they tout as demonstrating their fiscal restraint, not to cut taxes for one bloke unless they simultaneously raise taxes on some other bloke, by at least as much as the tax cut (a net raise is all right).

In other words, Democrats have pledged never to cut our taxes overall; every tax cut must be "paid for" by a corresponding tax increase. Democrats stand foursquare against greedy taxpayers stealing the government's money via tax cuts.

By contrast, Republicans have pledged not to raise taxes on anyone. Ergo, any plan acceptable to the Democrats is rejected by the GOP, and vice versa.

The current scheme -- which would "pay for" the AMT tax cut by raising taxes on private equity funds, hedge funds, and partnerships, which are generally used by evil rich white people -- was supported by 44 Democratic senators, plus Independent-Democrat Joe Lieberman (CT, 75%) and Independent-Socialist Bernie Sanders (VT, not yet rated). 48 Republican senators voted against it (everyone but John McCain, AZ, 65%). All five of the presidential candidates who are senators of either party found occasion to be absent for the vote; and Majority Leader Harry "Pinky" Reid (D-Caesar's Palace, 90%) voted against it, just to be able to bring it up again under the arcane and occult Senate rules.

But Big Lizards has a suggestion that will resolve this entire mess. No, really. It's a solution so simple and obvious, we're convinced it won't cross the mind of a single representative or senator...

Indexing the AMT is expected to drop federal revenues by $50 billion for FY 2008; the Democrats say they don't want to raise the budget deficit by that much (though they don't seem to mind raising it for other reasons, such as socialized medicine), but the GOP says those taxes were never meant to be collected in the first place and mustn''t simply be shifted onto someone else's shoulders.

So fine. Why not just cut $50 billion in spending from the anticipated $2.9 trillion federal budget? That's a trim of just 1.7%... which doesn't seem so terribly out of reach. Even if we exempt the $717.6 billion in spending related to the military, the war on global hirabah, veterans' affairs, and NASA, that still leaves cutting the remaining $2.18 trillion by only 2.3%. We can achieve that goal by cutting all other budgets by 2.3% across the board, or by mandating the cut by department and allowing each department head to pick his own victims.

Republicans should be happy, because we're not simply robbing small investors to pay people with a lot of kids who live in California. And I'm sure Democrats will be ecstatic over the spending cut, because, as they say, they're only thinking of is fiscal responsibility!

All right, problem solved. See how easy that is -- assuming one isn't a member of Congress?

Hatched by Dafydd on this day, December 6, 2007, at the time of 2:24 PM

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» The Impasse in Congress: May We Make a Suggestion? from Big Lizards
The august New York Times has a snarky article about the inability of Congress to enact, well, almost any legislation at all under the Democratic leadership of Senate Majority Leader Harry "Pinky" Reid (D-Caesar's Palace, 90%) and Squeaker of the... [Read More]

Tracked on December 7, 2007 7:22 PM

» And One More for the Road from Big Lizards
On the final day of the first session of the 110th Congress, before the Democrats got out of town, they managed to squeeze in one more humiliation at the brawny hands of George W. Bush: Congress on Wednesday gave final... [Read More]

Tracked on December 19, 2007 9:36 PM


The following hissed in response by: Bookworm

That is an excellent explanation of a vexing and, for people like me, very costly bit of Congressional legerdemain (or do I mean thievery?). Shame on you, though, for the radical and obviously unpalatable suggestion that Congress put itself on a budget. It's practically anarchic of you to suggest that the Porkiest Congress in history should stop spending your money, my money and everyone else's money like water.

The above hissed in response by: Bookworm [TypeKey Profile Page] at December 6, 2007 8:33 PM

The following hissed in response by: Geoman

Another idea...

Get rid of some of the mroe odious portions of the AMT and create a creeping flat tax.

The above hissed in response by: Geoman [TypeKey Profile Page] at December 7, 2007 9:15 AM

The following hissed in response by: Geoman

Another idea...

Get rid of some of the more odious portions of the AMT and create a creeping flat tax.

The above hissed in response by: Geoman [TypeKey Profile Page] at December 7, 2007 9:15 AM

The following hissed in response by: mike volpe

The AMT is just one example out of many in which politicians use taxes as a means of fighting class warfare. It is also a lesson in how taxes morph into something totally different than their original purpose. This is a lesson to all those that believe it when a pol claims to make things "fairer" by taxing the wealthier. Usually, that tax winds up coming back at the very people they claim to represent.

This is why class warfare is one of the most insidious political tools there is. Here is my analysis of the AMT and other taxes of class warfare.

The above hissed in response by: mike volpe [TypeKey Profile Page] at December 16, 2007 10:09 AM

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