The Alternative Minimum Tax Would Cut $192bn From George Bush's Tax Proposals

Mike Godfrey, Tax-news.com, New York

10 April 2000

The Congress's Joint Committee on Taxation has said that nearly 27 million US taxpayers will be ineligible to benefit fully from George W. Bush's planned tax cuts because of an unpleasant tax measure called the Alternative Minimum Tax.

The AMT, a product of left-wing 'politics of envy' was introduced to prevent investors and the wealthy from sheltering too much of their income from taxes. It says, roughly speaking: 'If you're cleverer than the IRS and can use the law to avoid paying tax, then we'll just take your money anyway'. Income above a certain limit is taxed at up to 28% regardless of the individual's tax computation.

The Joint Committee said that in 2002 some 3 million tax returns would be affected by the minimum tax under current law, and that figure could grow to 14.7 million by 2010 because of rising incomes and the fact that the AMT rate brackets are not indexed for inflation. This phenomenon, sometimes called 'fiscal drag', which always tends to increase the tax take ahead of legislators' intent, is well known to economists and no doubt also to the IRS - but it escaped the notice of Congress when the AMT was introduced. The Committee said that the Bush tax plan would increase the number affected by an additional 12.2 million.

One aspect of Bush's proposal, doubling the $500 tax credit for children, does extend a current law to protect taxpayers from the minimum tax. But his plans to reduce regular income tax rates, which now range from 15 percent to 39.6 percent, to a range of 10 percent to 33 percent, would subject more people to the alternative minimum tax.

The Joint Committee gave as an example a taxpayer whose regular income tax is $10,000 and who has a tentative AMT of $9,500. Even if, under a tax cut, that person's regular income tax was reduced to $9,000, his or her tax liability would stay at the AMT level of $9,500.

Republicans tried to repeal the AMT when they took control of Congress in 1995, but President Clinton vetoed that attempt.

The Committee, in a report prepared for Rep. Charles Rangel of New York, ranking Democrat on the House Ways and Means Committee, said increased exposure to the minimum tax could reduce the size of Bush's tax relief by $192 billion over 10 years. Commenting on the report, Rangel said: 'Unlike Clinton-Gore, who vetoed AMT relief, the Bush government will look forward to working with Congress to protecting more Americans from AMT.'

Meanwhile, a report prepared by Deloitte & Touche for the New York Times compared how a dozen hypothetical individuals and families in various financial circumstances would fare under the Bush and Gore tax proposals. Unfortunately the accounting firm, like many people seemingly unaware of the AMT, did not take it into account in its comparisons.

Deloitte and Touche's initial results show that the Bush plan would be much more generous to the wealthy; for example a couple earning $450,000 would have their income taxes reduced by more than $12,000 a year while they would gain nothing from the Gore proposals. But calculations published by research organisation Citizens For Tax Justice taking the AMT into account show that a family with $400,000 income would have their tax savings slashed 41% by the AMT, while a family on $185,000 would lose 79% of the savings.

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