Saturday, December 15, 2007

The AMT and the Lessons of Taxation and Class Warfare

In 1969, in order to make sure that about 100 fat cats paid their fair share Congress created the Alternative Minimum Tax...

In August 1969 as he was preparing the next year's budget Barr warned that the country faced a taxpayers' revolt. He explained, according to the Washington Post, that in 1967 there were a total of 155 individuals with incomes over $200,000 who did not pay any federal income taxes; twenty of them were millionaires. These individuals successfully used all tax loopholes available to legally evade paying taxes. The revelation attracted wide media attention and led to public shock. As he presented the next annual budget, published in the final weeks of his administration, President Johnson indicated that the problem needed to be addressed...

Unfortunately what started as a tax against fat cats has now begun to affect a large majority of Americans.

For more than three decades, the individual income tax has consisted of two parallel tax systems: the regular tax and an alternative tax that was originally intended to impose taxes on high-income individuals who have no liability under the regular income tax. The stated purpose of the alternative minimum tax (AMT) is to keep taxpayers with high incomes from paying little or no income tax by taking advantage of various preferences in the tax code. The AMT does so by
requiring people to recalculate their taxes under alternative rules that include certain forms of income exempt from regular tax and that do not allow specific exemptions, deductions, and other preferences. For most of its existence, the AMT has affected few taxpayers, less than 1 percent in any year before 2000, but its impact is expected to grow rapidly in coming years and affect about one-fifth of all taxpayers in 2010. In her 2003 report to the Congress, the Internal Revenue Service's National Taxpayer Advocate, Nina Olson, labeled the AMT "the most serious problem faced by taxpayers."(1)

The evolution of the AMT from going after 155 fat cats to one that will hit ten million people if it isn't dealt with is a great example how taxes often morph into something totally from its initial purpose and should be a lesson to all politicians about the dangers of using taxes as a means of fighting class warfare.

Unfortunately, many politicians continue to use taxes as a means of fighting class warfare in hopes of finding themselves on the same side of the table with the majority of Americans against the wealthy. For instance, here is how Hillary Clinton feels about the estate or death tax.

“I am more focused on preventing the repeal of the estate tax and returning to what I think are fairer, more effective tax rates for the wealthiest. There may be an argument to be made, which I would be open to but I think you need to look at the entire tax picture. There isn’t any credible argument that the taxes under the Bush administration have gone down disproportionately on high-income investors and earners.”

So what is the so called death tax and why should everyone be concerned when a politician uses it as a means of class warfare?

The estate tax is technically a tax on the transfer of property to others, generally to children of a decedent. It was envisioned to prevent families from passing on huge fortunes and developing a type of royalty in America.

Once again, we have a tax created to make sure that we punish the fat cats. This time they are actually taxed in death. Unfortunately, while the tax death does punish the fat cats it also punishes another class: the savers. Here is a chart of the bottom line levels of an estate's value before it is taxed. For instance, in 2002, any estate worth one million dollars and more would have been taxed. Keep in mind that an estate is everything you own including your home. It is also any retirement that you may have saved up. Let's suppose you saved $100 per month for 40 years and earned an average of 12% on that money. That savings would grow to just over one million dollars after forty years. Someone saving 100 dollars a month is no fat cat and yet they would likely be affected by the estate tax.

Let's look at another tax used by many politicians as a tool in class warfare: the capital gains tax.

A capital gains tax (abbreviated: CGT) is a tax charged on capital gains, the profit realized on the sale of an asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations.

Here is what Barack Obama would like to do to the capital gains tax.

As part of his "Tax Fairness for the Middle Class" plan, Barack Obama is in favor of nearly doubling the capital-gains tax rate from 15 percent to 28 percent. Leaving the fairness issue aside for a moment—as well as the impact of higher taxes on economic growth—the Obama plan could also be called a "Ways in Which Government Can Collect More Taxes to Pay for New Spending" plan, since Democratic candidates are all scrambling to figure out ways to plausibly pay for
new healthcare, education, and infrastructure spending if elected.

Keep in mind that the capital gains tax taxes an gain in any long term investment including stocks and real estate. So, what percentage of American households currently own stocks?

Dramatically more Americans own financial assets now than in the recent past. As recently as 1980, only 4.6 million U.S. households owned mutual funds; by 2003 the number was 53.3 million.

More than half of American families currently own stocks, bonds or real estate. Nearly half of all U.S. households own stocks or stock mutual funds.

So, when Barack Obama promises to raise the capital gains tax to make the tax system more fair he is actually promising to raise taxes on more than half of American households and growing.

Another way in which politicians use taxes as class warfare is through the nebulous word: loophole. Whether its John Edwards, Barack Obama, or
Hillary Clinton, the word loophole is used as another tool in fighting class warfare.

Every day, millions of working Americans go to their jobs, play by therules and hope to make a decent living for themselves and their families. These workers strengthen our middle class and keep oureconomy going. In turn, the vast majority of American employers holdup their end of the bargain by treating their employees fairly.

But sadly, many working men and women are not being treated fairly because some businesses are using a little-known tax loophole to avoidpaying their fair share. It's workers and American taxpayers who paythe price.


New York Sen. Hillary Clinton, the front-running Democratic presidential candidate, on Friday urged closing a tax loophole that she said unfairly benefits a few top Wall Street financiers.

Clinton called the loophole a "glaring inequity" and joined other lawmakers in a push to raise the tax rate on "carried interest" gains made by senior partners in the booming private equity and hedge fund businesses.


Sen. John Edwards, D-N.C., told crowds Thursday in Des Moines, Iowa, that he would pay for new programs to benefit the middle class by closing loopholes and tax breaks now benefiting the wealthiest Americans.

Remember, the Alternative Minimum Tax itself was created to supposedly close a tax loophole that was also supposed to affect only the wealthiest Americans.

A tax increase speaks for itself. The problem is that many a politician have used tax increases as some sort of tool to appeal to emotions. We have a country of nearly half a billion people and at any given time there are millions who are less successful than they would like to be. Those millions can almost always be quantified by someone and put into percentages. The unsuccessful almost always have a resentment toward those at the top. Politicians see opportunities in appealing to such emotions. By increasing taxes that they see as primarily applying to the successful, they seek to score points with the masses who are largely less successful. Unfortunately, the reality of tax policy is almost never in line with the perception that is created by politicians.

Whether it is the AMT, the capital gains tax, the estate tax, or the nebulous tax loopholes, these, like most taxes, almost always end working the same: by affecting the majority of people.

1 comment:

spree said...

Great piece and the example of the Death Tax is one of the reasons this "tax everything" mentality is so sickening.

People pay taxes when they are alive, then they double tax them after they are dead.

Sickening political stance.

Good article.