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.

My Hubris Moment Vis a Vis Susan Estrich

I know that I am threatening to step over the lines of political analytical hubris as I disect this piece by Susan Estrich, however I will explain later what gives ME the right to challenge such an accomplished political operative. Before that, here is some disclosure. I am NOT a Huckabee supporter, and he wouldn't even be in my top three choices for the Republican nod. (I am a Rudy supporter)

Huckabee is now a bona fide contender because the knives are out all over the place for him. For instance, Rick Moran wrote this scathing analysis.

But Mike Huckabee is not a conservative – at least not any kind of conservative that I would recognize as such. His tenure as Arkansas governor was marked by a corn pone populism – part Huey Long and part Jimmy Carter along with a massive increase in the tax burden on the individual taxpayer in his state as well as a sharp rise in spending. Huckabee channeled the ghost of Huey Long in his funding of state road improvements – largely through a hefty gas tax increase and a controversial bond issue. He also put a $5.25 premium on nursing home patients and raised the sales tax in the state. The Club for Growth detailed his “conservative” tax policy and ideas:

...

The Club for Growth isn’t the only fiscally conservative group that has looked in askance at Huckabee’s record. The Cato Institute was also unimpressed by Huckabee’s tenure as governor. They gave him an “F” in fiscal policy for 2006. Hucksterites will point to his $80 million tax cut package he pushed through the legislature that eliminated capital gains taxes on home sales and indexed taxes to the inflation rate. But that’s just a drop in the bucket. While Huckabee claims to have cut taxes 90 times totaling $378 million, the state’s Department of Finance and Administration says he also raised taxes 21 times that brought in a whopping $883 million. Under his “conservative” governance, the “average Arkansan’s tax burden” went “from $1,969 in the fiscal year that ended June 30, 1997, to $2,902 in the fiscal year that ended June 30, 2005, including local taxes.”

Red State is having a virtual orgy of scathing analyses of Mike Huckabee. Michelle Malkin has weighed in negatively on her forte, illegal immigration. It is obvious that the right is now picking apart every nook and cranny of his record. I have never been one to look this deeply at anyone's record. I know that in reading some of the most extreme analyses of Rudy's record that a lot can be twisted. I HAVE FOUND that detractors and supporters alike have totally misanalyed the phenomenon that is now the candidacy that is Mike Huckabee.

It really comes down to two words: charm and charisma. Those are universally appealing qualities and Huckabee has them in spades. He far exceeds those qualities compared to any of his Republican opponents, and matches even Barack Obama in those two qualities. He has a solid resume to boot which is something Obama doesn't have. Charm and charisma is the simple and succinct explanation for his tremendous appearances in every debate, and he exhibits those two qualities in every interview and appearance.

This brings me back to Susan Estrich. Now, the reason that I have decided to put Estrich in my cross hairs and not everyone of my colleagues is that she doesn't simply misanalyze Huckabee but the entire state of our party. Second, she is a Democrat and with all due respect to her, she knows less than me, a Republican, about the dynamics of our party. Now, here is a sampling of her analysis.

Huckabee is an interesting guy. He is a straight shooter, a former Baptist minister, a born-- not born-again--conservative.

But as a Democrat, am I worried about Hillary or Barack taking on this former Arkansas governor?

Not a little. Certainly not a lot.

Not only is he out of step with the rest of America, as opposed to the right tail of the right tail of the Republican party, which is to say the religious conservatives who dominate the caucus and primary process, on social issues, but his proposals in such areas as federal taxation and especially Social Security are enough to make any Democrat’s mouth water.Not that anyone loves taxes, but eliminating the IRS and progressive tax system and replacing it with one that puts a flat tax on all consumption, which is the most regressive way to pay our bills, doesn’t have political winner written all over it. It’s one of those ideas that people with no chance of winning run and lose on. Think Steve Forbes. It’s not one you want to defend in the World Series.

But that’s nothing compared to his proposal to get rid of the payroll tax for Social Security, and his support for private retirement accounts. Did anyone say Florida?

There is plenty to blast here. First, the minute you don't take someone seriously as an opponent is the moment your opponent defeats you, just ask USC about their loss to Stanford, the Soviets about their loss to the U.S. in 1980, Georgetown about their loss to Villanova, and the St. Louis Rams about their loss to the Patriots in 1999.

Second, while she claims that most of his proposals aren't mainstream, she backs none of it up with data. She claims ridiculously that the flat tax is a loser by attaching it to Forbes. The Flat Tax is not necessarily a loser, Steve Forbes is. The flat tax is new and revolutionary and most people don't know it or understand it. What such a proposal needs is a great ambassador to sell it. What a great salesperson needs is: charm and charisma. See where I am going here. Huckabee has all the attributes that Forbes was missing to be able to sell a revolutionary idea to the public like the flat tax. Besides what exactly will the Democrats counter with, tax increases?

She claims that while no one likes the IRS or taxes the flat tax is regressive. It is but it also gets rid of income taxes entirely. It bulks up sales taxes which are entirely voluntary (in other words you choose to buy stuff). In any case, I don't want to debate the fair tax here. What I do know is that the fair tax can be framed just fine if it has the right person framing it. Clearly, she dislikes the Fair Tax and dismisses it out of hand without much analysis. I believe that by doing so Estrich...well let me let Vizzini of The Princess Bride explain...

fell victim to one of the classic blunders! The most famous is never get involved in a land war in Asia, but only slightly less well-known is this:

...believing that something you don't like will also be disliked by the public at large.

She, not surprisingly, condescends to his faith and spirituality as if he is out of the mainstream. Eighty percent of this country is Christian. They may not be a Baptist Minister like Huckabee, however, again, when he speaks about his faith people WILL be impressed because: Charm and Charisma.

She claims that she wouldn't be worried about a race between Huckabee and Hillary. I would. Huckabee is charming, charismatic and likeable and Hillary is not. He compares just as favorably against Obama, given that he is experienced and Obama is not. Everyone compares favorably to Edwards so that is beneath me.

The worst part of the analysis is the claim that Huckabee's rise is indication that our party is in trouble. Nothing could be further from the truth. His rise shows that our party is strong and vibrant. It shows that we have a plethora of good, qualified candidates that can at anytime capture anyone's attention. The Democrats have a scandal ridden, cold unlikeable, candidate who's only accomplishment is being married to a popular President competing against a lightweight with less than four years of national experience. In third position is a total fraud who claims to be for the little guy while living in a home that measures five digits in square footage. None of the other candidates are worth even one look.

The Democrats are arrogant and cocky because they think that Iraq has dragged the Reps down to where they can't recover. I think that will all change soon enough, and their cockiness is quite obvious in Estrich's piece. There is a reason why superbia, or pride and arrogance, is one of the seven deadly sins, and the Democrats should heed the warning not to revel in it.

Finally, I am still a bit of an internet dunce. Thus, I can't seem to figure out how to put the video into this post. Thus, for an example of Huckabee's charm and charisma check out the video in the post directly above this...