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The Alternative Millionaires' Minimum Tax

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President Obama last night unveiled a new twist on an old idea in his State of the Union address to Congress -- limit the loopholes and tax giveaways that very wealthy people use to reduce their taxes far below the rate honest workers pay. Obama called for a minimum tax rate of 30 percent on income over one million dollars. To some, this sounds like a radical idea, but it really isn't. It is merely a refinement of a part of the tax code that has been with us for decades: the Alternative Minimum Tax.

The A.M.T. was enacted for precisely the same reason Obama is calling for a 30 percent tax rate on every dollar made over and above the first million per year -- fairness. The ultra-wealthy have always been able to afford spending money to use tax shelters and tax attorneys to move their dough around so they avoid paying what they should be paying -- the same rates everyone else pays. So the A.M.T. was introduced to fix the problem. If you make a substantial amount of money, you must figure your income taxes two ways: the traditional way, and using the A.M.T. worksheet. Whichever's higher, in essence, is what you must pay (if you fall under the rules for using the A.M.T.).

Now you may be thinking, "I've heard of the A.M.T. before... something about Congress 'fixing' it... " This is where we get into some massive budgetary fiction, or (if you prefer) blatant hypocrisy by our lawmakers (of both parties, it bears mentioning). The problem stems from the fact that the A.M.T. has not been truly modernized in quite a while. The income limits it set when it was enacted covered people who made a lot of money back then -- but when you fast-forward three or four decades, the same dollar amount now regularly hits people in the middle class (and really hits people in the upper middle class), rather than its intended target: the truly wealthy.

This is where the hypocrisy comes in. Why don't the folks in Congress just up the limits? It's common sense, right? If there's a problem with the dollar limits to the A.M.T., then adjust the limits and it works as intended again. Simple!

Well, that's what does indeed happen. Every single year, like clockwork, Congress passes an "A.M.T. fix," usually late in December when they think nobody's paying attention. They do not do this by honestly fixing the law, but instead by only carving out an exemption for a single year. There's a reason for this, which is where the budgetary fiction comes in. When Congress puts together a federal budget, they project it out for ten years into the future. These projections are nothing more than smoke and mirrors to begin with, because nobody -- that's nobody, no matter how many economic degrees they have -- can accurately predict the future, whether economically or otherwise. Putting that fiction aside, though, the A.M.T. is a fiction on top of this basic budgetary fiction. Because the A.M.T. -- if not "fixed" -- is scheduled to take in billions and billions of dollars in tax revenue. To put it another way, by using the outdated A.M.T. formula in the ten-year projections, it makes the budget picture look rosier than it actually is. If the A.M.T. were permanently fixed -- instead of year-to-year, the way it is done now -- then the deficit projections would be a lot larger. The fact that this is closer to actual reality matters little, because most people aren't aware of the fiction and the hypocrisy Congress regularly operates under.

So we continue "fixing" the A.M.T., and Congress pretends that they're not going to fix it for the next nine years, and the budget numbers are easier to work with -- even though Congress does indeed fix the A.M.T. each and every single year, and the tax revenues in the budget projections never actually appear. Once again, to be clear: both political parties are in on this scam. They both use the fictional numbers, while they know full well it is nothing more than a pipe dream that this money will ever materialize in the U.S. Treasury.

Which brings us back to Obama's suggestion in the State of yhe Union. While to some it might sound like a brand-new program, it really isn't. It would just be beefing up and modernizing the A.M.T. so that it works as it was originally intended -- to make sure the ultra-wealthy are paying the same rates as everyone else. But there's a golden opportunity here as well, because Obama's plan would bring in more money -- actual, real money and not fictional, budgetary-dream money. Because more money would be coming in, it would be the prime time to institute a permanent "fix" on the A.M.T. -- because the new income could balance out the "loss" of the fictional income in the ten-year budget projections.

It is silly and (at its core) dishonest to "fix" the A.M.T. every single year as if it is some sort of emergency situation. It should be fixed once and for all. If Obama's new "Alternative Millionaires' Minimum Tax" were combined with such a permanent fix, it could also be a lot easier to sell politically, since it would be "lowering taxes" on millions of households (in the ten-year projections), while only forcing a relative few households to "pay their fair share, just like everybody else." I realize this is no more than political rhetoric, and I also realize the chances of Obama actually passing this scheme are extremely low this year.

Whether it passes or not, it's an idea that most Americans are going to agree with -- even more so if the threat of paying the A.M.T. is removed entirely for (say) all households making less than $250,000 (Obama's usual dividing line for the middle class). End the A.M.T. on the middle class, and beef it up considerably on the millionaires and billionaires. Tying the two together is the logical way to go, and it also has the benefit of removing the yearly hypocrisy over the fictional budget numbers for nine out of ten of the projected years. It's time to end this scam -- perpetrated by both parties -- once and for all. Obama should go ahead with his A.M.M.T., and at the same time reform the A.M.T. so that Congress won't have to perform this fudging of reality every single year.

 

Chris Weigant blogs at:
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