The Tax Foundation released an interesting report about seven months ago that is necessary to bring up now, especially with the grand debate over the Alternative Minimum Tax.
First off, my "representative" is Tom Reynolds. Reynolds is obsessed with this issue. He says he wants to protect "middle-class taxpayers" from paying what he calls the Stealth Tax. In fact, Reynolds might be painting a false picture, as are many other critics of the AMT.
The Tax Foundation report tells the whole story. The report was written by Gerald Prante, a staff economist with the Tax Foundation. (Note: Prante also appeared on my radio show in September to discuss property taxes in upstate New York.) Prante appeared on C-SPAN last week to discuss the AMT.
From Prante's report:
Over the past few years, the growth of the Alternative Minimum Tax (AMT) has received more attention than any other federal tax issue. Many politicians have proclaimed that the AMT foists an unfair financial burden on "middle-class" taxpayers who allegedly were not helped much by the Bush tax cuts. This Fiscal Fact shows that, on the contrary, current AMT filers benefited enormously from the Bush tax cuts.
IRS data show that most people filing the AMT now earn between $100,000 and $500,000. If the Bush tax cuts and the AMT disappeared today, nearly every one of those taxpayers would pay more to Uncle Sam, often thousands of dollars more. In fact, average AMT taxpayers in 2007 under current law will pay nearly $2,800 less, even counting their AMT payments, than they would pay if the Bush tax cuts had never happened. On the other hand, tax returns not scheduled to be hit by AMT in 2007 will save an average of $989 from the tax cuts this year.
First off, those of us in Reynolds' district would love to see earnings of over $100,000. I think a lot of people would love to see $100,000 or more a year in their hands. The truth is that doesn't happen.
As Prante describes here, if you take the AMT AND Bush's tax cuts away, the people between $100,000 and $500,000 would pay MORE in taxes every year.
Thus, the big secret. Not only did those who make six figures benefit greatly from Bush's tax cuts, but because of Bush's tax cuts, the AMT has virtually no effect. Sure, you pay out for the AMT, but you're still saving money!
More from Prante's report:
The Alternative Minimum Tax is a parallel tax system that requires taxpayers to re-calculate what they owe, using different rules and rates. These AMT rules include a generous initial exemption yet allow fewer deductions than the regular code. The AMT is closer to a flat tax, with only two tax rates, 26 and 28 percent. Once somebody calculates what he owes under this system, he compares it to what he has calculated with the regular tax rules. The taxpayer pays whichever is larger, and if it's the AMT, then he's officially an AMT filer.1 (For more on the AMT, see Tax Foundation Special Report, No. 155, May 2007.)
The Bush tax cuts are scheduled to push more people into AMT in 2007 because the cuts lowered the ordinary rates while doing little for the AMT system. Only annual patches—dramatic hikes in the exemption level—have prevented the number of AMT filers from soaring, and while such a patch is likely again this year, the political rhetoric regarding who these AMT taxpayers are needs to be put in proper perspective.2
Even though the Bush tax cuts have pushed more people into this parallel tax system, the AMT certainly does not take back all the tax savings that the tax cuts conferred. On the contrary, people have been pushed into AMT over the past six years largely because of the dramatic tax cuts on the regular side of the tax code.
The table below shows that for those 23 million taxpayers expected to file an AMT return in 2007 (under current law, assuming no change in the exemption level), the savings from the Bush tax cuts far outweigh the additional AMT burden.3
So what's there to conclude from this? Here's what I came up with.
Those who supported Bush's tax cuts (Republicans like Reynolds) created the AMT mess that they don't like (Republicans like Reynolds). In essence, it's not the AMT which imposes itself on people and has increased the amount of people that must pay the AMT. In fact, it's the Bush tax cuts which created this mess.
Oh, the irony!
And if you don't get it already, use this chart for some perspective:
AGI Group |
Savings from Tax Cuts Before AMT |
Extra AMT Payment |
Net Tax Savings |
All AMT Returns |
$4,696 |
$1,920 |
$2,776 |
$1-$50,000 |
$1,042 |
$300 |
$742 |
$50,000-$74,999 |
$1,352 |
$420 |
$931 |
$75,000-$99,999 |
$2,279 |
$793 |
$1,486 |
$100,000-$149,999 |
$3,224 |
$1,515 |
$1,709 |
$150,000-$199,999 |
$4,301 |
$2,497 |
$1,804 |
$200,000-$499,999 |
$8,185 |
$4,687 |
$3,498 |
$500,000-$999,999 |
$23,223 |
$4,804 |
$18,420 |
$1M and over |
$134,399 |
$7,152 |
$127,247 |
Source: Gerald Prante, Tax Foundation
The conclusions made by Prante are that due to the Bush tax cuts, more people have had to pay the AMT. This is true, as evidenced above. But, Prante adds that without the Bush tax cuts, these people would be paying out more in taxes. Just look at the chart. With Bush's tax cuts in place and the AMT, these people are still SAVING in their tax bill. Nevertheless, my view is that the Bush tax cuts still force the middle class citizens to pay the AMT, meaning they save less. Certainly, millionaires save less, but they are still saving over $127,000 even when they pay the AMT!
Look at the millionaires for example. The Bush tax cuts (some would argue, include myself) benefit this segment more. This chart makes that obvious. For instance, let's say you have Person A and Person B. Person A makes $1 million and Person B makes $100,000. Before the AMT, Person A is saving over $134,000 (or 13.4% of his earnings). Person B is saving $3,224 per year (or 3.2% of his earnings).
After the AMT, Person A is saving $127,000 (or 12.7% of his earnings) while Person B is saving $1,709 (or 1.7% of his earnings). Meaning the Bush tax cuts and the AMT TOGETHER benefit the wealthy more than they benefit the middle class citizens.
Thus, the Republicans game. They want you to believe that the AMT is bad. In reality, it's doing what it's supposed to do.
So while some, like Tom Reynolds, would make you believe that the AMT is the problem here, the true culprit is Bush's tax cuts. Bush's tax cuts have forced more and more people into the AMT. More and more people who are middle class citizens. Yet, the excuse that Reynolds and his clan makes is that the AMT is the problem.
But it's really the same Bush tax cuts that they support. And if they cut the AMT, then the wealthy will benefit once again.