ataxingmatter

Ed Kleinbard speaks out on the AMT

As longtimer readers of this blog are aware, I have written extensively about the alternative minimum tax (AMT).   I have noted that there is no need to repeal the tax, as the right-wing "tax cuts solve all problems" think tanks urge.  In fact, I have counseled that we should appreciate the role of the AMT, as devised by Congress over time.  It prevents taxpayers from benefiting too much from "loading up" on tax expenditures in their favor.  We would be better off with some simple reforms--such as an indexed exemption amount appropriately targeted at the bottom half of the income scale and adding capital gains, charitable contributions deductions in respect of untaxed appreciation, and the home mortgage interest deduction to the preference list--and retention of the AMT as an important revenue source for the Federal government.  This is particularly true to the extent that we retain any of the 2001-2003 tax cuts, which gave the greatest benefit to taxpayers at the upper end of the income distribution.

Ed Kleinbard, the chief of staff for the Joint Committee on Taxation (and a former partner of Cleary, Gottlieb, the New York firm in which I practiced prior to moving to academe), spoke about the AMT in a similar vein at the 32nd Annual Tax Law Conference in Washington this month.  He pointed out that there is no design flaw in the AMT.  It has undergone several revisions since its origination in 1969 after Congress realized that some 150-odd wealthy taxpayers had gotten by with paying no tax at all.  Those revisions broadened the base and increased substantially the group expected to pay the tax.  That historical fact is another inconvenient  truth for the Republicans in Congress, who have mounted an effort to repeal the AMT (at a cost of more than a trillion) without offsetting revenue increases, with political rhetoric that says the AMT was never intended to operate the way it does but was supposed to reach only a few ultra wealthy taxpayers. Kleinbard "avoided linking his argument to the political debate, but he said that the belief in the 'primordial' AMT prevents engagement with the real policy choices about revenue needs, government spending levels, and the relative taxation of different parts of the economy."  Chuck O'Toole, Kleinbard Rebuts AMT 'Mythologies', 118 Tax Notes 1169 (Mar. 17, 2008).

Deborah Schenk on the AMT

Several years ago, I wrote an article on the AMT, Congress Fiddles While Middle America Burns, that clearly went against the trend.  While most everyone was arguing for repealing the AMT, I argued that it should be kept, with some amendments, even though it was a parallel system to the regular tax system.  I founded my conclusion on two key points, one external to the tax system and one internal to it.  The external motivator was, I said, distributive justice--the overarching underpinning of a just tax system based on ability to pay.  The internal motivator was the concept of a structurally coherent tax system.

I considered the AMT's broadening scope, as the relationship between the AMT and the regular tax was loosened with the Bush cuts and it reached farther down into middle income classes and the resulting increase in cries for AMT repeal based usually on arguments of downward creep, lack of transparency, lack of consistency with the regular tax, complexity, and apprehension of "accidental taxpayers."  I concluded that none of those arguments justified AMT repeal.  The argument from consistency, for example, misses the point of the way the AMT works--reducing the benefit, in the aggregate, of the AMT preferences and adjustments like the personal exemptions and the state and local tax deduction.  Exploring those two in  particular, I found that the inconsistency between the AMT and the regular tax was in fact coherent with the structure of the two subsystems. With similar arguments on the other issues, I concluded that, imperfect though it is, the AMT does collect revenues, important when the country is faced with a growing debt burden and high deficits, and it does hit higher income taxpayers more than lower-income taxpayers.  That adds to the overall progressivity of the tax system (countering the Bush tax cuts' push towards income inequality) and satisfying the distributive justice criterion.

I suggested, though, that the AMT could be improved (not made perfect) by some amendment to its flaws, again looking towards distributive justice and structural coherence.  As I noted then, "[t]his conclusion does not disregard the flaws of the current AMT system, nor does it suggest that an ideal reform of the current tax system would retain an AMT.  The conclusion is one based on normative values stressing distributive justice and coherence in the context of the current deficit situation....and the need to retain whatever tools possible to ensure that higher-income taxpayers actually pay taxes on their economic income to the federal government."

I am pleased, therefore, to see Deborah Schenk's 2007 Colombia Tax Policy Colloquium article, "The Political Economy of Tax Reform: The Case for Retaining the AMT" (Nov. 29, 2007).   Prof. Schenk reiterates many of the arguments I made in my 2004 paper, though her policy orientation is different.  Rather than stressing distributive justice and coherence, she makes the implicit argument about the difficult political situation for tax reform the cornerstone of her analysis of the AMT.  This is a helpful perspective, because it helps to move academic thinking away from the ivory tower world of optimal taxation to the real world of enactable policy and complex consequences. 

Prof. Schenk considers public interest theory, public choice theory, the more nuanced views of Dan Shaviro, and the "ex ante rent extraction" approach of Ed McCaffery and Linda Cohen.  Taken together, these analyses of the political situation show how difficult it is to have Congress work harmoniously towards a beneficial tax policy that puts public good front and center rather than the narrow and self-serving desires of special interest groups.  She concludes from that that "tax reform is not on the horizon"--the current context simply does not provide the factors that any of the theories suggest are necessary for systemic reform.   This section is fun reading (though still in draft form).  Here's some of the salient items from her list of reasons: lack of small groups able to push for legislation; lots of small changes more beneficial for interest groups and legislators than one big one; lack of consensus among experts about the best tax reform;  lack of a well-informed public about fiscal policy and the tax code; the sound bits and uncivil discourse on TV and the web; the rhetoric of politica; lack of "policy entrepreneurship; the "permanent campaign" for Congress that eliminates focus; weak leaders; partisanship; the benefit to maintain the status quo; procedural and budget constraints; transition problems; gimmickry; and the obsession with marginal rates rather than an overall understanding of the tax system.

Given all that, Schenk concludes that the AMT should be retained for its revenue--we simply can't pay for repeal, and we need the extra revenue; for its contribution to progressivity; and as a possible way to deal with making the Bush 2001-2003 tax cuts permanent.  She looks at and dismisses the flaws in the AMT most noticed by critics (complexity, transparency, downward creep; preferences; the original goal of hitting non-tax-paying ultrawealthy).  She considers some finetuning to make the AMT work a little better:

• maybe changing the state and local tax deduction, or maybe not (she cites me here);
• eliminating the miscellaneous deduction as a preference (we disagree here--I think it is aimed at avoiding too much personal expense parading as business);
• maybe harmonizing the regular tax's personal exemption and standard deduction with the AMT exemption (but like me, she notes that the AMT exemption substitutes for this and is quite large);
• harmonizing the medical expense deduction maybe (citing me here);
• providing the same filing status (AMT has no head of household, which makes no sense);
• dealing with complexity (hasn't resolved this yet);
• finding additional revenue for the flaw-fixing that is done, perhaps through
  • making capital gains an AMT preference (I recommended this too);
  • treating the appreciation on contributed property as a preference (citing me here); and
  • cutting back on other tax preferences (home equity indebtedness; home mortgage interest beyond a cap (maybe on debt of $500,000 instead of a million) (I agree).

While many of the AMT-specific analyses and recommendations have been raised before (many of them by me and by others before me), what Schenk has contributed here is a more focused analysis of the political context in which tax decisions are made and the way that context influences the possibilities for broad tax reform.  We tax academics often write as though no real consequences would result, or we make limiting assumptions about the most difficult issues that often predetermine the conclusions.  This is particularly true of efficency analysis, which is more often than not the guiding light for academic studies of tax.  While I often complain about reality TV, it is good to see a little "reality tax thinking" from academe.

AMT: more borrowing, but from whom?

When the Republicans in the Senate held out against any revenue raisers to pay for the AMT "relief" for all those upper-middle class taxpayers making mostly above $200,000 who would have been caught by the alternative system without the one-year patch, they acted like it didn't matter that it would cost the government billions in revenue.  We're spending billions in occupying Iraq, billions more in arms, and in the meantime Congress sees fit to enact another tax cut without paying for it.  That means, of course, that the US federal debt will have to increase even more, and it will be the next generations that will pay for it. 

But will there always be somebody interested in buying that debt?  With the dollar's value sinking and the economy looking like it might slip into recession, maybe those who've been our piggy bank--China, Japan, the island nations, and the UK-- will decide they've had enough and would prefer euros to dollars.   China seems to be heading that way.  Floyd Norris, China Less Willing to be America's Piggy Bank, NY Times, Dec. 22, 2007, notes that China bought one fifth of the Treasury securities issued in 2004, 30% of the issuance in 2005 and 36% in 2006.  But this year, China reversed course and has become a net seller of Treasury securities.  Even so foreigners continued to be the financiers for the American government's needs beyond its fundraising through taxes--$197.4 billion in the first ten months of 2007. 

Makes no sense, does it--we cut taxes for the rich, and we borrow from foreigners (individuals and sovereign nations) to pay for our needs.  If those foreigners reach a point where they quit buying, the Treasury securities will still need to be sold.  So what will happen?  Interest rates will have to increase to attract buyers, making our debt burden a higher share of GDP and pushing down on the U.S. economy even further.  That's a likely scenario, though it will depend on the fate of the dollar and the view abroad of the likely future of the American economy.

AMT Legislation for 2007

Dear Readers:  I am finally over the lung infection that made it impossible for me to blog over the last month.  Of course, now the holidays are upon us, and likely there is little interest in the musings of a tax prof about the vagaries of congressional action (and inaction) and administrative laissez-faire.  But I will perservere, nonetheless.

So Congress finally acted on the AMT before the holidays.  After some heated debate about the pay-go rules, the House Democrats on December 19 went along with the wimpy Senate Democrats and passed a one-year AMT patch--H.R. 3996, the Tax Increase Prevention Act of 2007-- that does not raise the lost revenue, with a vote of 352 to 64.  Good for those 64 in the House who voted against the bill in order to raise adequate revenues to compensate for whatever AMT patch was really necessary.  The Republicans did what the Democrats just can't seem to find the guts to do--held firm on their stated view that an AMT patch should raise the deficit rather than be paid for with reasonable provisions, because, they claim, it was never intended to reach the group it now reaches.

What is most disturbing about this is that Congress has now explicitly recognized that the hedge fund managers and other partners who get "profits" interests for their services are essentially scamming the government and ordinary taxpayers by converting compensation income in many cases to capital gains income.  Their use of offshore accounts to defer the inclusion of income is another device that gives results in less taxation for these wealthy managers, since the deferral in many cases means almost not tax.  That was the provision that the House attempted to include in its last vote before the decision to go with no revenue raisers.  See this story on the Dec 13 House vote.  As Rangel notes, "No one has the guts to defend the offshore deferred compensation. ... We know that it is indecent and immoral."  Id. 

Once Congress recognized these inequities, its failure to act speaks volumes about the way Congress is captured by special interests--especially the Republican party that used their close minority status in the Senate to protect those wealthy hedge fund managers who would have been subject to tax on their compensation like ordinary taxpayers are under the two House proposals (one regarding "carried interests" and the other eliminating deferral of offshore compensation income).  The hedge funds and equity funds flooded Congress with lobbyists, arguing to protect their special interests, to a degree not seen before.   Remember their claims that equity fund managers wouldn't have any incentive to manage without getting their cushy capital gains rates?  That of course is pure baloney.  Sixty-five percent of millions is still a lot of money to incentivize adequate management and entrepreneurial activity.  Of course, most of these money managers are not really entrepreneurs--they are merely making money using other people's money.  As Mike Ross (D-Ark) put it, the "Senate and House Republicans have decided to side with tax cheats and their offshore accounts."  See this Dow Jones Newswire story by Michael Crittenden.

And of course the Republicans' other argument about the AMT is simply nonsensical--that it was intended to be a tax on rich folks and so therefore there should be no tax increase when Congress changes it to protect the upper strata of the income classes from its impact.  That is simply wrong as a historical matter.  The AMT long ago became something quite different--an alternative system aimed at ensuring that those taxpayers who enjoyed a number of special benefits built into the tax code (like the mortgage interest deduction which provides by far the greatest benefit to those with expensive homes and high incomes) weren't able to get too much of a free ride from accumulating different benefits.  And the Republican-controlled Congress was well aware that the AMT would "clawback" the Bush 2001-2003 tax cuts for a sizeable group of the upper middle class when those tax cuts were passed.  They intentionally left the AMT, to pretent that the tax cuts were not as devastating as they actually are in terms of increasing deficits and requiring additional billions of borrowing.

It's actually quite sensible to have a system that takes back various of the special deductions that can pile up for some taxpayers.  Else the rich will continue to get richer at the expense of the ordinary guys, as has been the case particularly over the last few years.  There was simply no need for an AMT patch for those making $200,000 or more, the majority of the group that would be subject to AMT taxation to any significant extent.

And as for that other recurring theme, the complexity of having an alternative system, this patch has nothing to do with relieving that.  The dual system continues.  The complications of the current AMT could be relieved, of course, as I have suggested, by setting the exemption levels so that ordinary taxpayers who are truly in the middle class or lower income distribution--those earning less than $150,000 a year, maybe--do not have to bother with the AMT.  And the AMT could better target the upper middle class and upper class by making the capital gains preferential rate a special AMT adjustment item.

It is discouraging to see how easily the wealthy can twist Congress to their bidding.    Congress should focus on those who merit tax assistance--ordinary taxpayers who are in the lower distribution quintiles and should stop allowing those with money to speak so loudly in its hallowed halls. 

AMT legislation hits snag in Senate

As most readers know, the House passed a progressive one-year patch for the AMT, H.R. 3996.  In that bill, the AMT exemption was increased significantly for one year, offset by a number of tax provisions that primarily impact upper-income taxpayers by clawing back some of the excessive benefits rovided under the 2001-2003 tax cuts.  The result would be a more progressive tax system.

But partisanship in the Senate seems set to derail that responsible reform.  See, e.g., this article from the Hill by Jessica Holzer: Senate GOP Coordinates AMT Attack" (Nov. 10, 2007), noting that the GOP Senators are using the veto threat of a widely disliked President to try to ram through legislation that borrows money for a tax break for wealthier Americans rather than paying for the legislation with provisions that actually increase the fairness of the tax system, such as taxing hedge fund managers' compensation the way every other wageearner is taxed. 

(Of course, there are those integrity-challenged Democratic Senators from the Northeast who are having trouble with the idea of making mangers that earn hundreds of millions a year pay income tax at ordinary income tax rates on their compensation--they blather on about worrying about the effect on the economy of taxing these people on their take home pay, and we all know that is nuts.  What they are really worried about is losing the donations to their campaign chests.)

Remember that the 2001-2003 tax cuts were passed with several phony gimmicks to make it look like the revenue reductions benefiting wealthy Americans were not coming on the backs of ordinary taxpayers.  The chief gimmick was a sunset provision, that allowed Congress to pretend that the massive revenue reductions enacted wouldn't really harm the federal fisc because the impact was countermanded by restoration of the original tax structure in after 2010.  The second gimmick was retention of the Alternative Minimum Tax, which Congress knew would begin to "claw back" the revenue reductions, especially for the upper levels of the middle class, very soon after enactment.  Those two gimmicks were necessary to avoid having a fiscally disastrous long-term budget outcome.

Now, of course, the Republicans are hoping to reap the benefit of their gimmicks by arguing that letting the 2011 tax restorations to take place(that they enacted into law in the first place) would be a Democrats-imposed tax hike!  They want to have their pie and eat it too.  In this case, the "pie" is tax cuts for the wealthiest taxpayers, from the capital gains cut to treating dividends as preferential capital gains to reduced rates for the top brackets.  The "eating it too" is doing those cuts in spite of the tremendous impact on the revenues available to the government to fund government activiites, including the trillions of military costs (for actual appropriations as well as needed funding to replace used up military supplies).  And on top of that, they want to pretendthat they are also friends of ordinary taxpayers, by thwarting passage of an AMT patch unless it is treated as costless. 

The House passed a responsible bill that provided AMT patch relief by delaying a tax benefit passed for multinationals (world wide interest expense allocation) and eliminating the preferential treatment of the compensation income of hedge fund managers, among other things.  The Senate had hoped to pass a similar bill, but Republicans have derailed it.  Republican leaders refused yesterday to go along with a Senate plan to call the House bill for a vote.  And negotiations today have failed to reach a solution.  Senators are likely to be unwilling to fight for appropriate financing of any AMT patch.  That's a shame, because it would mean that the distasteful gimmicks used by the Republican Congress in 2001-2003 will have succeeded in accomplishing their goal of pretending to behave fiscally while actually intending to behave irresponsibly.  With an election year fast approaching, Senate Democrats should think twice about letting the Republicans set the agenda in this way.   

As Citizens for Tax Justice notes in "Congress and Public Face Start Choice on AMT," it would be a major setback if the Senate undermines the "pay -as-you-go" provision to provide AMT relief for upper class taxpayers without an offset provision.  That would amount to just another tax package favoring the wealthier amongst us, since the main beneficiaries of AMT relief earn from $84,000 to about $500,000 a year (i.e., the top quintile, except for the very top one percent).

But the Republicans in Congress aren't happy with that.  They want to extend the Bush tax cuts, again without appropriate revenue raisers, pushing the country into deeper deficits long into the future with AMT and Bush tax cuts going primarily to the well-off.  Reid spokesperson Manly has it right when he notes, in the Hill article cited earlier,

“The reality is that Republicans are not only blocking attempts to provide AMT relief but, audaciously, many are demanding additional tax breaks for the wealthy as a price for passing AMT relief. This is cynical politics at its worst,” he said.

See, for example, this April 2007 Republican policy statement, suggesting that the need to pass another AMT patch (admittedly costing at least $132 billion over two years) should be an opportunity for making permanent the preferential treatment for capital gains.  Almost all the benefit of the capital gains preferential rate is enjoyed by the wealthiest of taxpayers, so this is an unalloyed attempt to make the income tax even less progressive and more favorable to the wealthy.  As Warrent Buffet said at the Finance Committee's estate tax hearing, that is not the way to go, unless we want to turn our democracy into a plutocracy.

Or, as CTJ puts it:

  It's worth remembering that the particular tax cuts Republican leaders are most enamored with almost exclusively benefit the wealthy. For example, a key cut lowered the rate for dividends (which were previously taxed at ordinary income rates) and capital gains (which were previously taxed at an already low 20 percent) to 15 percent. Capital gains and dividends should both be taxed at ordinary income rates. CTJ's estimates have found that the lower rate for both cost around $92 billion in 2005 alone and about three fourths of the benefits went to the richest 0.6 percent.

CTJ notes that making the temporary Bush tax cuts permanent would cost about $5 trillion over 10 years, which even Bush economists have admitted do NOT pay for themselves in economic growth.

AMT legislation: House passes pay-as-you-go AMT patch

Last Friday, the House passed H.R. 3996 216-193, the AMT patch bill that includes a number of other extenders and revenue offsets resulting in revenue neutrality to the tax cut for ordinary American taxpayers.  The House report is available here.  The White House has threatened a veto, and it looks like right now there would not be enough votes to override.  What a shame that this Congress is still stuck in carrying out the Republicans' fantasy of a no-tax world (at least, a no-tax world for the rich). 

Not surprisingly, Republicans objected, and Senate Republicans threaten to filibuster the bill unless it is passed without the revenue offsets.  What are the revenue offsets?   For example, one is the taxation of managers' "carried interest" as ordinary compensation income rather than preferential capital gains income.  As the Democrats noted in their release on November 8 right before the House vote,  there is broad public support for this change, which would remove an inequitable loophold for wealthy fund managers and tax them like everybody else is taxed on their compensation.  So why are Senate Republicans willing to filibuster the bill and cause a delay that may well create confusion and cause ordinary Americans to lose out on the benefit of the one-year patch?  I guess they'd rather the managers (Wall Street high-fliers with money to spare for campaign contributions) get treated preferentially and who cares about ordinary taxpayers.  The Democrats paint it more starkly--as Republicans being willing to "bankrupt America" with "borrow and spend" policies rather than to vote for fiscally and equitably sound policies.  See this Nov. 9 release. 

As Rangel put it in a third release, the question is "whose side are you on?"  You can support "responsible tax relief for millions of hardworking, middle-class American families" or preferential treatment that "protect[s] the special interests of a privileged few."

The Republicans have their own version of the news.  Sam Johnson, Republican from Texas, calls the carried interest tax an "assault on free enterprise."  See Jonathan Weisman's article in the Washington Post, House Passes Bill to Ease Alternative Minimum Tax, Nov. 10, 2007.  That statement is outrageous in itself--as though correcting the inequity of taxation of carried interest would somehow cause the economy to go into a tailspin. 

(Aside--we are already in a tailspin, with the credit crunch and the housing slump being what might have been expected, in part, from the way financial institutions have dominated our economy and the lack of any tough policies on environmental and other concerns over the last few years or on multinationals removing their assets (especially intangibles) to operate in other countries.   Recession is almost surely in the cards; and depression--even a major depression--seems quite possible.  The "growth" that this government has touted due to its tax cuts has been anemic at best, and certainly hasn't made up for the fact of the long-term impact of record deficits year after year.)

The Republicans put their case forward in this press release.   They claim to be doing the math right, compared to Democrats' wishful thinking.  But note the trick.  They assume as the baseline a budget that already extends all the 2001-2006 tax breaks and makes them permanent.  Then they compare to that a budget that doesn't, and conclude that's a tax hike.  Now, in reality, the tax breaks, unless extended, will expire and so it's not accurate to call the taxes that result from the way the code is currently written a tax hike.  Nor is it accurate to call a tax base that assumes the law is different from the way it actually is the "baseline"!  That's wishful thinking, at the least, and distortion to misrepresent the facts, at the most realistic.  So the Republicans' release is typical of the AMT gamesplaying that has been going on since the original 2001 - 2003 tax cuts.  They knew then that the tax cuts designed by their party would provide a benefit primarily to those at the top of the income distribution, and they also knew that there would be an increasing clawback of the apparent tax cut benefit for people not at the top of the income distribution, directly because of the way the AMT works.

That's not the only way Republicans are misrepresenting the facts.   Jim McCrery, ranking Republican on the House Ways and Means Committee, claims that the AMT was only intended to apply to wealthy Americans and so the budget shouldn't take the tax cost of "fixing" the AMT so that it doesn't apply to anybody else into account.  See this New York Times article from November 10 by Edmund Andrews, House Backs Tax Relief but Fate in Senate Uncertain.  That statement about the AMT is bunk, to put it mildly.  Congress has tinkered with the AMT over the years so that it has long been a separate system intended to tax those who enjoy substantial benefits from the so-called AMT preferences.  It hasn't been a tax just for the super-rich for quite a few decades.  For the Republicans to now claim that it is (when in fact they kept it at the time they enacted their tax cuts for the rich because they knew it wasn't) is deceptive--they are not being honest with the American people.  Finally, the mainstream press is beginning to acknowledge this, as in the case of the cited New York Times article which notes that the Bush Administration and Congress depended on the revenue streams from the increasingly broad-hitting AMT in claiming that the revenue reductions from their tax provisions were not anything to worry about.

Democrats in the Senate (and those few who voted with the Republicans in the House) need to get over their fear of upsetting contributors (see House Backs Tax Relief but Fate in Senate Uncertain, noting that Democrats are "torn between party instincts and alienating big contributos") and start voting their consciences.  They would likely find a hugely appreciative electorate.  If Senators like Chuck Schumer let their big contributors (like Blackstone) win the day, it will be a sad day for ordinary Americans.  Taxing carried interest like any other compensation income is the right answer.  Hopefully the managers' lobbying funds won't sway the votes.

AMT Patch: White House Threatens Veto

Not surprisingly, the White House has issued a Statement of Administrative Policy on HR 3996, the AMT patch legislation (available at this time on BNA at http://op.bna.com/dt.nsf/id/csaz-78rlj3).   

The statement indicates that Bush advisers will recommend a veto of the bill for three reasons:

• An AMT Patch should not have raise taxes on anyone to pay for the relief for ordinary taxpayers
• The offsets--like the carried interest provision and the delay of the world-wide interest allocation change for multinationals--hurt the ability of US taxpayers to be competitive globally
• The bill repeals private debt collection for federal income taxes.

Will Congress cave to this pressure from an administration?  Consider private debt collection for federal tax liabilities.  The Bush administration has consistently favored privatization even where the activity is quintessentially governmental, such as collection of taxes, and even when it is shown, as it has been in the debt collection case, that the government can collect more money more cheaply and more accountably to the people than privatized collectors can. 

And consider the "competitiveness" argument.  This is one of those arguments that sound good on paper but don't have much to back them up.  Sure, people like to pay lower taxes.  But will managers of funds quit managing because of having to pay the same taxes on their compensation that the typical worker does?  Doubtful.  Will having taxes on equity funds mean all that activity will go overseas?  Also doubtful.  Other countries are considering how to tax those kinds of activities more equitably.  Fund structures once established are not easily disrupted.   And we could also make changes to our international tax provisions that more reasonably tax assets that are taken out of the country rather than encouraging companies to move overseas through our lax tax treatment of those transactions. 

What about the interest allocation provision?  That change should never have been enacted in the first place.  For a multinational corporation, where it borrows is almost entirely elective, and money is, as we say, fungible, so that an interest deduction can be used to selectively reduce taxes.  The provision doesn't eliminate double taxation--it more likely ensures inadequate taxation.

The White House wants its way. That way is too favorable to the wealthy and multinationals.   It pushed huge tax breaks for wealthier Americans without footing the bill back in 2001 and 2003, knowing all the time that the AMT would be there to shore up the breaks with a back-door tax on the upper middle class. 

Congress shouldn't go along.  It should be thinking about ordinary taxpayers and the real needs of the country for tax revenues.

Citizens for Tax Justice Supports Rangel Plan; Ways and Means passes a Patch

As most readers will know, House Ways and Means Chair Charles Rangel introduced a major tax bill to repeal the alternative minimum tax (AMT) and expand several other tax provisions of particular benefit to lower-income taxpayers.  The revenue to offset the $930 billion 10-year cost of the bill would come from reducing the benefits of the Bush tax cuts to those Americans at the top of the income distribution, as well as closing a number of "loopholes" that likewise primarily benefit high-income taxpayers.   

Citizens for Tax Justice released its analysis today, indicating its support for the provision because it would "make the tax code simpler and fairer, without increasing the federal budget deficit."  See Chairman Rangel's Tax Bill would Make the Tax Code Simpler & Fairer--and the Changes are all Paid For, CTJ, Nov. 2, 2007.   Simpler--because the AMT is repealed and the standard deduction increased for individuals, while loopholes that distort decisions are eliminated for corporations, resulting in a slightly lower corporate tax rate.  Fairer--because the larger standard deduction and tax credits for low-income workers are paid for by scaling back the excessive Bush tax cuts for those at the top.  No deficit--because the Bush pattern of cutting taxes and "putting the costs on the national credit card" is replaced with provisions that "pay[] for the tax cuts it provides to the vast majority of Americans in a responsible way."  Id.

Alternatively, Rangel also introduced an AMT patch that would offset the $50 billion cost (of the patch and a few other relief measures) with revenue raisers primarily targeted to high-income taxpayers.

The Congressional Research Service has released a report, updated Oct. 17, 3007, authored by Gregg Essenwein and Steven maguire,  on "Alternative Minimum Taxpayers by State: 2003, 2004 and Projections for 2007,  Download crs. Alternative Minimum Taxpayers by State. 22083.pdf . That shows that in 2004, 3.1 million taxpayers were subject to the AMT, in 2005, 4.1 million, and in 2007, absent legislative change (and no one-year patch), it would be 22.2 million taxpayers.

The Republicans on the House Ways and Means Committee tried today to defeat the AMT patch because it is funded with offset provisions.  They argued that the provision was never intended to reach broadly and therefore the cost of repeal simply shouldn't be counted.  That is a disingenuous argument at best. 

First, the numbers the CRS report provides have been projected from the beginning of the Bush tax cuts.  Congress did not change the AMT when the Bush tax cuts were passed in 2001-2003, because the revenue was needed to avoid a deficit meltdown.  Repeal would have cost about a trillion, and there were already more than a trillion in tax cuts planned (primarily benefiting the better off). 

Second, the AMT has not been targeted exclusively at the very rich for quite some time.  It was changed many times after its first introduction.  While it is true that when first introduced it was intended to reach the very rich who otherwise would pay no tax because of their extensive use of the various items eventually labelled "AMT preferences," it became a broad-based alternative tax system decades ago, one that is intended to limit the ability of many upper-middle and upper-income taxpayers from using excessive preferences to avoid what Congress considered to be their reasonable share of the overall tax burden.

Today the House Ways and Means Committee defeated, on a party-line vote of 22-13, the Republican attempt to eliminate the AMT without any revenue offsets.   Instead, HR 3996 was passed with its AMT patch and revenue offsets for the almost $80 billion cost. Revenue raisers include taxing the "carried interest" of fund managers as ordinary compensation income and ending the ability of hedge fund managers to defer compensation income through use of offshore shelters.  Another revenue raiser is a  delay in the implementation of a provision fought for by US multinationals and won --new interest allocation rules that permit more of the US company's interest to be allocated against its US income, reducing US tax liability, even though the borrowing is generally fungible as to location.  Rangel, by the way, has included a provision in his reform bill (HR 3970) that would eliminate that interest allocation revision.

The bill also repeals the authority for the IRS to use private debt collectors. 

And it includes a provision permanently excluding mortgage debt forgiveness income. 

[As readers know, I think the latter is a mistake, though the tax professoriate appears to be divided on that one.  I am concerned about the bias towards housing debt (rather than, for example, major medical bills).  Since insolvent taxpayers already had a remedy, this provision overreaches without resolving the main problem in our economy from the bursting of the housing bubble, which is that banks appear to have exploited lower income homeowners with high interest rates on subprime loans and left them high and dry without any relationship with a lender to work it out because they could securitize the loans and offload their risk.]

The Republicans promise a floor fight when the legislation reaches the full House, probably next week. Ways and Means OKs Tax Bill with AMT Patch, Extenders, After Partisan Fight on Offsets, BNA Daily Tax Report, Nov. 2, 2007, at GG-1.  Republican Whip Roy Blunt claimed that "It makes no sense to raise taxes on critical investors that fuel our nation's economic growth in order to pay for fixing this onerous and punitive tax."  Id.  The Republican rhetoric that the carried interest preferential treatment and the ability to defer taxes on regular compensation income are necessary because these fund managers are "critical investors that fuel our nation's economic growth" surely has to fall flat on most Americans' ears.  These managers are making millions of dollars managing other people's money.  They are paying less in taxes than others who earn a living, because of the peculiar flexibility deemed possible under the partnership "profits interest".   To suggest that the economy will falter because of taxing these people at the same rates at which we tax other workers is simply not based in economic reality or even in the "free market" rationales that the same Republicans espouse.

The AMT: A One-Year Patch

Senator Baucus, Chair of the Senate Finance Committee, said this week that he would move a one-year patch on the alternative minimum tax (AMT) rather than attempt any larger reform of the provision.  Today, House Ways and Means Chair Rangel concurred, saying that he will introduce a stopgap measure to prevent the extension of the AMT further down the distribution this year, and introduce a more comprehensive tax bill that would repeal the AMT that would likely not be acted on this year. 

While the reach of the AMT into the middle class extends each year because of the interaction of lack of indexation and the upward creep of incomes, the most significant numbers impacted are upper middle income families with incomes in the $200,000 to $500,000 range.  (The highest income families do not pay AMT since their regular tax liability is higher because they are in the highest rate bracket, even though the regular tax base is less broad than the AMT base.)

The cost of repeal is a major consideration.  Repealing the AMT will result in billions of dollars of lost revenues to the fisc.  Repealing the AMT and making the Bush tax cuts permanent could have strongly negative budgetary consequences.

Both Baucus and Rangel have suggested that action on the carried interest issue--the ability of hedge fund and private equity fund managers to earn what seems clearly to be compensation income yet have it transformed into income taxed at preferential capital gains rate by the alchemy of the current treatment of a partnership "profits" interest-- may come into play in connection with the AMT as a possible revenue raiser, though most likely only in a bigger package to be considered next year.  Rangel has left an opening for making the carried interest change in connection with this year's AMT patch, according to BNA's Oct. 17 Daily Tax Report (RealTime).

Finally, the same BNA release notes that Senator Grassley, ranking minority member on the Senate Finance Committee, said today that a compromise might be to index the AMT for inflation so as to eliminate the downward creep, while at the same time making some adjustments to limit the AMT to the "superrich".   That may be the start towards a workable solution.  I have urged that the AMT be indexed for inflation, starting with a suitable exemption level that would protect ordinary middle class taxpayers from the AMT.   A reasonable amount for the exemption level would be around $100,000 (twice the median income) or at most perhaps as much as $150,000 (three times the median income).  In that way, the AMT would apply only to the upper-middle class and above--those at the top of the income distribution.  I'd also add the capital gains preference to AMT adjustments, so that the huge benefit of the capital gains rate is undone for taxpayers in the upper brackets.  My version would include more taxpayers and more items within the AMT's reach than Senator Grassley's (and cost less to enact), but both would accomplish a core goal of exempting ordinary taxpayers.

The AMT Hearings in the House

Hearings last week in the House began to look for a lasting solution to the downward creep problem of the AMT, which could affect taxes for some households with income as low as $50,000 without some changes.  See Lori Montgomery, Democrats Look for Permanent AMT Fix, Washington Post, Mar 8, 2007, at D1 (quoting Representative Neal, chair of the select revenue measures subcommittee of Ways and Means, as seeking a permanent fix for the AMT problem and Ways and Means chair Rangel as considering "redirecting" the 2001-2003 tax cuts to fund the solution).

What I found interesting about the new discussion of the AMT problem is the Republican willingness to continue to play the blame game rather than deal with the real issues.  Phil English (R-PA) pulled out the old line that Democrats are engaging in "class warfare" for wanting to assist those at the lower end of the income distribution at a potential cost of slightly higher taxes to those at the higher end and asserted that "We're not going to allow our pro-growth tax policies that are expanding the economy to be held hostage to an AMT fix." Id.  Now, it seems to me that English is missing the point. 

First, for the last six years the Republican-dominated Congress and Administration have passed a series of revenue reduction bills that have given the broadest benefits to people at the top of the income distribution while making a variety of arguments for eliminating "entitlements" that most clearly benefit those at the lower end of the income distribution. Those polices are the real class warfare, because the result is that the have-mores get more.   Protecting the more vulnerable in the lower half of the income distribution by asking the more able to pay to bear more of the burden isn't class warfare--it's responsible and equitable tax policy.

Second, it's not at all clear that the Bush tax cuts have been "pro-growth."  Just look at the concern, expressed broadly across the pages of the Wall Street Journal and the New York Times, about the likely impact of a continued housing slump on broader economic concerns.  See, e.g., Gretchen Morgenstern, Mutual Funds at Some Risk on Mortgages, NY Times (Mar. 14, 2007); Reuters, GMAC to receive $1 billion from GM, NY Times (Mar. 14, 2007); Stephen McMahon, Market Hits More Turbulence,  Herald Sun (Mar. 15, 2007).    It is certainly not clear that whatever economic expansion the country has enjoyed has reached very far down the income distribution.  Economic expansion for the rich accompanied by relative stagnation for everybody else is not a good situation if one cares about democratic institutions.  An AMT fix for those on the lower end of the distribution is necessary for those ordinary taxpayers and may be absolutely vital to any continued economic growth in the US, given the importance of middle class consumption spending to the economy.   One reason for today's market slump is that investors are worried about the impact of mortgage defaults on retail spending and banks. Stephen McMahon, Market Hits More Turbulence,  Herald Sun (Mar. 15, 2007).

The Republicans in Congress and in the White House also say they want to "rein in the AMT."  Lori Montgomery, Democrats Look for Permanent AMT Fix, Washington Post, Mar 8, 2007, at D1.  But they've had six years to do it and have instead resorted to one-year patches coupled with continued support for making the Bush tax cuts permanent.  Id. The one-year patches are one way to claim that tax cuts passed for the primary benefit of the wealthy are not creating as significant a budget problem as they in fact are doing.  Len Burman from the Tax Policy Center testified, however, that the tax cuts have "doubled the size of the AMT problem."  Id.  Bob McIntyre from Citizens for Tax Justice testified that making the tax cuts permanent would cost about $5 trillion dollars between 2011 and 2020 if the increase in interest on the national debt is taken into account and at least the current patches for the AMT are continued.