Wednesday, April 21, 2004

The wealthy versus the superrich: guess which side Bush is on?

The federal Alternative Minimum Tax is on a course that will pit the moderately wealthy against the superrich within the next several years, with the Bush tax cuts being a deciding factor as to which side will win. The bottom line is that even relatively wealthy people with incomes in the $100,000 - $200,000 range may pay less taxes under Kerry than they would under Bush. We'll see if this is recognized anywhere.

Can't do this without a boring background paragraph first. The AMT was designed to ensure that very wealthy taxpayers would not be able to pay little or no income tax on the basis of deductions found in the "regular" income tax, so an alternative calculation is also used, and taxpayers must pony up the difference if the AMT is higher than their regular tax. Two problems: the tax rate used to make sure only the rich got caught by the AMT was not indexed to inflation, and a large exemption meant to protect the moderately wealthy will become smaller starting in 2005 (background articles for the facts in this paragraph are here, here, and here). Nineteen thousand people paid the AMT in 1970, 2.6 million pay it today, and 30 million will pay in 2010 unless the law is changed, according to taxpayer "advocates". That 30 million figure is a strawman, however - Congress will not let the AMT catch 30 million people. The question is how extensive a fix Congress will do. A fix that limits the AMT to its current level will cost $600 billion up through 2010, and who knows how much more after that.

The year 2010 is the magic date - Bush's tax cuts will magically expire then as well. Actually, expiration is also a strawman. Congress will extend the cuts in some form, the question is to what extent the cuts will be made permanent. This is the conflict between the wealthy and the superrich. Will the AMT catch 2.5 million people, 4 million people, or 10 million people? The 7.5 million who might escape the AMT are the moderately wealthy whose fate depends on whether the Bush tax cuts favoring the superrich will be moderated enough to allow a fix of the AMT.

I hope the Kerry campaign picks up on this - one would think the moderately wealthy would provide some balancing power against the incredibly rich. The question is whether the 0.5% richest in America are more politically powerful than the remaining 99.5% of the population. Close call.

UPDATE: The Democrats are starting to see the issue, reading these sentences buried in a NY Times article: The Democratic proposal on marriage-penalty relief, sponsored by Representative Charles B. Rangel of New York, would have included additional tax breaks to protect two-income couples from the alternative minimum tax. But it would have paid for the tax cut through a new surcharge of 3.6 percent on people who earn more than $1 million a year, which would have raised $207 billion over the next 10 years.
The Republicans rejected this idea, and instead voted to increase the budget deficit by $105 billion over 10 years to pay for a marriage penalty tax cut. This suggests their strategy on the AMT may be to simply fix it without paying for it, and add the cost to the budget deficit. I don't think that's viable though, so they will still have to choose between moderately wealthy and the superrich.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.