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.

Rudy On Leadership, the GWOT, Healthcare and More

I had a chance to see Rudy Giuliani speak at the Italian American Sports Hall of Fame in Chicago on Friday. While I don't necessarily have too much reference point, I do believe that in most ways this was much like any campaign towhall meeting and speech. It was still quite illuminating nevertheless.

I believe you can tell a lot about a candidate's agenda by what they focus on during such a meeting. The first policy that Rudy spoke about was illegal immigration and how important it is to finally get a handle on it. His newfound commitment towards combatting illegal immigration will no doubt be met with skepticism and controversy by many of my conservative colleagues. Unfortunately, it is one of those debates that is in many ways pointless. There will be plenty that will look at his prior New York City record and concluded based on past performance that he isn't serious. There will be those like me that will look at his current plan for illegal immigration and say he always gets accomplished what he sets his mind on. His plan involves beefing up the border patrol, building a fence technological and real, and creating a tamper proof ID card. Thus, take it for what it is worth.

His thoughts on the GWOT were no doubt general. His first thought vis a vis the GWOT is that we must stay on offense. This has became his calling cry with regards to this issue. He believes in victory in Iraq and he defined that as an Iraq that is an ally not an enemy in the GWOT. He believes that it is NOT an option to allow Iran to get nuclear weapons. He also mentioned that Pakistan must be worked on though frankly besides vague ideas his plan was short on specifics. Some might take this as a sign that he may not be the right person however I would humbly disagree. Rudy has a long and very successful history in confronting and beating bad guys. As U.S. Attorney, he took on and defeated the mafia in his district. As Mayor of New York City, he took on the criminals and beat them lowering crime dramatically. He has a history of taking on bad guys. He has a history of beating them. While the terrorists may not be a perfect comparison to the bad guys he has a history of beating, his prior accomplishments can't be ignored when determining the best terror warrior.

The most fascinating portion of the meeting, for me, came in his answer regarding health insurance. Rudy's plan to revolutionize health care is entirely conservative. The hallmarks are lower taxes, health savings accounts, and market principles. He believes that much of the problem comes in the fact that people don't usually choose their own health insurance. Since most get it through work, it is essentially chosen for them. As such, when it comes to health insurance, people aren't the dutiful consumers that they are towards other products and services. Through credits, tax breaks, and health savings accounts, Rudy believes that individuals will be able to not only buy their own health insurance but at a lower cost than they normally do. In many ways, Rudy's vision of health care mirrors that of John Stossel's. Consumers drive down the price of everything and drive up the quality, and we must give the consumer choice back to the individual. He does it through health savings accounts, credits, and tax breaks. He also pointed out that our litigious society has created an environment of defensive medicine and higher costs. He proposed that the loser of any lawsuit must pay for the costs of both parties to limit many of the more egregious lawsuits.

On taxes and spending, Rudy tried to wake up the echos of Ronald Reagan. He stressed over and over his commitment to limiting the size of government. It was his solution to a whole host of economic related problems. He pointed out that limiting the size of government is largely done through leadership. He pointed out that none of his deputies in New York City ever came to him asking to make the budget for their respective department smaller. Thus, it was ultimately up to him, the Mayor, to stand firm in limiting the size of government even if he had to take on his own administration to do it.

He spoke about productive and unproductive taxes. An unproductive tax is one that is among the most extreme when compared to the civilized world. For instance, he pointed out that our corporate income tax is one of the highest in the entire civilized world. He said that if we merely lowered our tax so that is closer to the middle not at the top that it would keep a lot of the business we lose. He said his tax policy would focus on identifying and lowering those taxes that he determined to be unproductive.

He ended the meeting with an answer to something dear to my heart, the mortgage crisis. He said that he thought Paulson's plan to freeze rates was a good idea. I was quite put off by this question, and and if you want to know why please read this. He also said something very interesting right afterwards. He said that he believed that it was a good idea especially in light of pending Congressional action. I took this to mean that this was the least of two evils. If freezing rates means halting action on such things as H.R. 3915, then while it is still not a good idea it might be better than the alternative.

He was asked how he would confront the mortgage crisis, and this he answered perfectly. He pointed out that the duty of the President is NOT to focus on any given segment of the market but rather to be a proper momentum builder for the economy as a whole. He believed that shrinking government and waste would not only strengthen the economy but the housing market. One can take this as a canned answer, and to some extent it is, however I personally find it a positive that a Presidential candidate doesn't feel the uncontrollable urge to tinker with every portion of the economy that may be going wrong at any given time.

The meeting was revealing not only for what he said but what he didn't say. There was absolutely nothing about any social issues. Clearly, Rudy is trying to downplay his socially liberal record as much as possible and frankly his supporters didn't much care because there were no questions. I was surprised that he didn't touch at all on judges as well, though I assume his public unabashed support for strict constructionists holds. He also said nothing about guns or the environment as well. Rudy took out a lamenated card that had his twelve commitments. That is where I believe his focus will be in his administration. If you are worried about Rudy's position on any matter, check the twelve commitments. If that position isn't on there that, it is unlikely his administration will spend much time on the issue anyway.

All in all, I found Rudy to be quite charismatic and charming, still maybe not quite Mike Huckabee, but charismatica and charming nonetheless. At one point, a voter revealed that not only was he a supporter but also a registered Democrat. Rudy, spontaneously, came over and gave the man a big bear hug. I continue to maintain my support for him, and all reasons stand. He is a proven leader. He has a proven track record. He has a proven history of shrinking government, cutting waste, cutting taxes, expanding choice, and confronting bad guys. In this day and age, I believe that is exactly what we need.