Taxation WITH representation

[flamin lib]

The Alternative Minimum Tax was passed into law in 1970 because the very wealthy were able to take enough deductions to effectively pay no taxes. “Very Wealthy” in 1970 meant the top 10% of incomes. I only have figures for the top 5%, so for the sake of argument I'll use that number. The AMT was and remains a good idea but as written it has a fatal flaw; it isn't indexed for inflation. $100 in 1970 money is $530 today. In 1970 the middle income was $35k, the top 20% made $83k and the top 5% made $128k. Today those numbers are $48k, $144k and $254k.

How the AMT works: In 1970 Congress said, “OK all you 5%ers, we’re going to figure your tax as if you only took regular deductions and if your tax bill is actually less than that you lose all of your deductions.” The assumption was that if the actual tax bill was less than someone who took ordinary deductions you must be using a lot of tax loopholes and accounting tricks. All legal, but not in the best interest of fairness and equity.

So, at $120k the average taxpayer has $50k in deductions and will have a tax bill of $20k. If the actual 1040 shows a liability of, say, $15k the taxpayer will owe the $20k and 20% of the $50k in deductions (the AMT) or a total of $30k in taxes. The tax liability increases dramatically as the income goes up. Had the AMT been indexed to inflation it wouldn't kick in until an individual hit $250k and then only if there were extraordinary deductions for capitol gains, tax deferred income and the like. This is way oversimplified but you get the idea.

The AMT in real life: The AMT is currently on holiday because the Republican Congress last session chose not to deal with it on a permanent basis. Why? Because to abolish the AMT would cost so much they would have to raise taxes elsewhere and they just can't do that even if its vital to the economic health of our country. Instead they borrow a couple $trillion from China. Were it in effect it could apply to households with as little as $50k in after-deduction income. *Note: the examples above are for conversation only and are a gross oversimplification. The actual process for determining if the AMT even applies has 16 line items and nine pages of instructions.*

Tax Reform Democratic style: Charles Rangel (D NY) is working on a reform of the tax code to correct the problem with the AMT while remaining revenue neutral in keeping with the Democratic policy of Pay as You Go.

Rangel’s plan would abolish the AMT altogether. To replace the lost revenue there would be a 4% surtax on personal income for individuals with more than $200k in adjusted gross income and an additional .6% on adjusted gross incomes above $500k. So, if a single taxpayer earns $550 after deductions he pays regular tax on all $550 plus 4% on $200-500 and 4.6% on $500-550. Is this a tax increase? Not exactly. Because the AMT will no longer apply most tax payers will not see an increase in tax liability until adjusted gross income reaches more than $300k. That’s $300,000 after all deductions so the initial income is almost $400,000 before deductions.

While we're at it, fix other inequities.

At the lower end of the income scale Rangel’s plan would increase the standard deduction, increase the earned income tax credit and child credit for qualified children in earned income tax credit families.

At the upper end of the income range, those households with more than $500,000 adjusted gross income, there would be a phase out or reduction of some deductions for un-earned income and other capitol gains type tax protections. Yes, that is an outright tax increase on the top 1% of income earners.

There would be tax reform benefiting veterans, teachers, and rewarding charitable contributions. Offsets would include accounting changes for individuals: things like selling property to a related individual to reduce tax liability.

For Corporations there would be a reduction in income taxes from 35% to 30%, a 3% deduction for manufacturing inside the US, extension of small business deductions, target tax advantages for doing business inside our borders and simplified accounting practices. These would be paid for by closing loopholes for off-shoring some income streams, closing tax advantages for off-shoreing some business practices and other accounting changes. These changes are designed to stimulate business and reward domestic investment.

The proposal, still a work in progress, is summarized here with most of the costs and offsets clearly listed: http://waysandmeans.house.gov/media/pdf/110/Summary%20for%20Distribution.pdf ..

Is it perfect? Undertakings this large never are. It is not possible to ever completely “fix” government, which is why we keep tinkering with it, but this is a good start.

The loyal opposition is already beginning the attack, calling it the largest tax increase in history when, in fact, it is revenue neutral. Some of the disagreement is a genuine difference in philosophy about the nature of taxation and its purpose but for the most part it's pure partisan hyperbole. If a Democrat did it then it has to be bad, right?

Ignore the talking heads, read the summary and make up your own mind.