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Sunday, April 15, 2007

Another fine mess Clinton got us into!

The Alternative Minimum Tax is an example of a poorly designed government program, a tax-for-social-engineering from 1969 originally designed to punish 21 millionaires who were able to avoid taxes under that time's tax system.

Soon, that tax could affect more than a million times as many people, most of whom aren't millionaires.

Where does President Clinton fit into this discussion? Well, the Alternative Minimum Tax was originally a 24% flat tax, but increased in 1993 to a two-tiered tax with rates of 26% and 28%. Without that increase, the number of people affected by this tax would be 2.6 million.

OpinionJournal.com has the statistics.


At 12:30 AM, Blogger honestpartisan said...

How does raising the rates make more people liable to pay the tax?

At 9:51 PM, Blogger Greg said...

Your tax is the higher of the tax under normal rules and the tax under the Alternative Minimum Tax rules. If your 1040 tax is $12,500, and your taxable base for the Alternative Minimum Tax is $50,000, your AMT if 24% of $50,000 is $12,000, and if 26% of $50,000 is $13,000. Only under the higher tax rate does this hypothetical person pay taxes under the AMT.

At 9:54 AM, Blogger honestpartisan said...

OK, but didn't Clinton raise non-AMT rates, too? Wouldn't that make it a wash?

At 12:31 AM, Blogger Greg said...

That is possible. However, for the topic I'm addressing, it's not particularly relevant.

The issue is that the Alternative Minimum Tax, which was designed to hit a few millionaires, is hitting these people at all. Clinton's AMT tax increase didn't help there.

I am not a tax lawyer, of course, but the typical negative impact of the AMT comes for families that use a lot of deductions. The government imbeds quasi-incentives to home ownership, child rearing, and the like, and helps mitigate high state and local taxes. The AMT throws all of those away. Too bad if you're a family with 7 kids living in New York.

The amount of money that the AMT was collecting in 1993 was certainly smaller (CBO indicates it affected less than 1% of taxpayers), so any additional revenue could have easily been arranged through the regular income tax rates.

At 2:14 PM, Blogger Matt G said...

"honestpartisan" is exactly right. The 1993 Clinton tax changes did three things that affect the AMT:
1) increase the AMT rate. This, taken on its own, would put more people in the AMT.
2) increase the regular top rate. This, taken on its own, would put LESS people in the AMT.
3) increase the AMT exemptions. This, taken on its own, would also put LESS people in the AMT.

This is complicated stuff, and the net impact of these changes is not obvious at first glance. Fortunately, smart people have estimated this impact for us. The Tax Policy Center says this: "the OBRA93 changes to the AMT and to regular tax rates alone—ignoring the EGTRRA rate cuts—would have reduced the number of AMT taxpayers in 2010 by about 2 million." See http://www.taxpolicycenter.org/UploadedPDF/901053_Responsible_AMT.pdf .
So if the Clinton tax changes weren't responsible for the impending AMT boom, that raises two big questions:
1) Why would the Wall Street Journal editorial you cite try to mislead people about this?
2) What's really to blame for the coming AMT crunch?

There's no point in venturing an answer to #1.
But #2 is really quite simple. Two things created the AMT boom:
1) the ongoing failure of Congress to index the exemptions for inflation between 1987 and the present day-- a thing for which every Congress shares blame.
2) The 2001 tax cuts, which cut the regular top rate without cutting the AMT rate, thus putting the AMT on a collision course with millions of families.

Without venturing further comment on why the WSJ did what they did, it's important to note how cleverly misleading they were. They took two policy changes-- the 1993 AMT changes, which slowed down the rate of AMT growth, and the long-term failure of Congress to index exemptions, which obvious increased the rate of AMT growth-- and lumped their impact together, and blamed the whole thing on Clinton. I can see how you'd get taken in-- quite a few people have-- but the WSJ's editorial remains basically a lie.


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