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Tax day is almost upon us and it is this time of year that the right wing begins to visit us with arguments about why the tax code should be amended to eliminate this unfair burden on the rich.

Chief among the arguments against the tax code is that the Alternative Minimum Tax is ensnaring large numbers of middle class taxpayers and that a solution to this "crisis" is to index the AMT. The truth is much more complex, and insidious.

Thanks to Professor Dan Greenwood of Hofstra University, for encouraging me to exerpt and edit his important commentary on the alternative minimum tax here.  The original op-ed was published in Newsday on April 8, 2009.  Below the fold is a modestly edited version.

The AMT was originally intended to catch rich tax evaders. But during the Reagan administration, it shape-shifted into punishment for high-tax, high-service states - like New York and California.

As Professor Greenwood tells us: The original AMT worked by creating an additional income tax, at a lower rate, that includes income that is untaxed intax shelters. People who don't have tax shelters could never be affected by it, regardless of indexing or inflation.

But in 1982, the Reagan Revolution changed it into something very different. The deduction for state taxes and the deduction for dependents were suddenly classified as tax shelters. Presumably to avoid a taxpayer revolt, the radical implications of this change were concealed by adding an unindexed income floor. Thus, the new provision would come into effect only gradually and invisibly as inflation and wage growth raised more taxpayer's incomes above this floor.

The 1982 changes were fundamentally dishonest. Neither children nor state taxes are a tax shelter. There's no reason to think that rich people are avoiding taxes by having children or paying state taxes. These are real expenses that really reduce middle-class families' ability to pay federal taxes.

Limiting the deduction for state taxes has nothing to do with limiting tax evasion by the rich. Instead, it is a simple penalty on high-tax states and their citizens - social engineering to try to force states, regardless of the views of their citizens, to adopt a low-service, low-tax model.

The intent and the effect of the "reform" was to increase the burden of state taxes, in the hope of getting high-tax states to cut their budgets. If a state chooses to tax its citizens to pay for schools, libraries, crime prevention and parks, to invest in children or infrastructure, to repair roads, or to pay for sound regulatory institutions - the Reagan-era AMT demands that its citizens pay federal taxes on income that they never received because it was withheld or paid out in state income taxes.

The only way for states to avoid such double taxation is to choose a low-tax, low-service, low-investment route - not providing the basic services that the middle class needs for a decent life and to make the next generation competitive. This approach goes hand-in-hand with the Republican strategy of "starving the beast", instituting changes in our laws which are designed to choke off funding for government programs.

Remember the famous New York Daily News headline"Ford to City: Drop Dead"?This revised AMT was essentially saying, "Die Slowly, States with Expensive Schools."

The AMT started out as an effort to ensure that everyone - even the rich - pull their own weight in the common enterprise we call America. Since middle-class people don't have tax shelters, in its original form, the AMT could never affect them regardless of indexing.

The 1982 amendments, however, sneakily changed the AMT into something very different - an attack on the autonomy of the states and punishment for middle-class families and voters who want their state governments to provide services and are willing to pay for it.

Professor Greenwood concludes: The solution to the AMT problem is neither repeal nor indexing. A simple change to its language would return it to its original goal: Restore the deductions for children and for state income taxes, neither of which is a tax shelter.

Then, if the advocates of low taxation and low services want to convince us to follow their low road, let them do so openly and straightforwardly.

If the great middle-class deductions are going to be repealed, the repeal should be in the open daylight. Do it in the main tax code, where the consequences will be obvious to all, or don't do it at all. State taxes should be determined by the states, not the federal internal revenue code.

Originally posted to doctoraaron on Fri Apr 10, 2009 at 02:16 PM PDT.


The AMT should be--

3%2 votes
46%29 votes
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| 63 votes | Vote | Results

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Comment Preferences

  •  No dice (1+ / 0-)
    Recommended by:

    Your premise is wrong.

    Noone is entitled to deduct their state income taxes.

    Let's say two couples making 200,000 a year.

    One couple lives in NH, with low taxes, the other, NY , with high taxes.

    NY resident will get a tax subsidy because he can deduct more state taxes.

       WITHOUT AN AMT, states with lower taxes subsidize those with higher taxes.

    •  Is that 200,000 a year for both (0+ / 0-)

      couples combined? Or for each couple separately?

    •  "Subsidy" is misleading (2+ / 0-)
      Recommended by:
      craiger, Massapequa Dem
      Tax is less a coherent logic than a jumble of preferences.  So the question isn't what coheres with the underlying logic (such that deviations could be characterized as subsidies1), but what kind of world we want2.  And the low-threshold AMT that captures state tax works against high-tax, high-service governments.

      Most of us here don't want low-tax, low-service state governments.

      1I think there's an interesting discussion to be had on what and how we use the term "subsidy," both descriptively and normatively, but that's outside the scope of this comment.

      2You seem to acknowledge just this when you note that no matter how we structure the AMT, someone is subsidizing someone else.

      We are building a team that is continuously being built. - Sarah Palin

      by burrow owl on Fri Apr 10, 2009 at 02:58:35 PM PDT

      [ Parent ]

    •  From the Professor... (5+ / 0-)

      "The deduction for state taxes  is only a "subsidy" if the neutral position is a double tax.  From the origin of the income tax until 1982, everyone agreed that the neutral position is to tax once, not twice.  Money that the taxpayer has paid in tax to the state is not "income" in the normal sense:  it isn't available for consumption or savings because it has already been paid to the government in taxes.  So the neutral position is to charge tax once -- either at the state level or the federal level.  The 1982 AMT means that some residents of high tax states are required to pay taxes on the same income twice.

      That also means that under the normal (non-AMT) system, the NH resident is not "subsidizing" the New Yorker or Californian who pays more taxes.  On the contrary, the NH resident is almost certainly free-loading off of the higher level of services in NY and CA, which provide culture, medical care, economic growth, universities, scientific and technological discoveries and so on for the entire country."

      Dr. Aaron Roland is a family physician in Burlingame, CA.

      by doctoraaron on Fri Apr 10, 2009 at 03:10:05 PM PDT

      [ Parent ]

      •  Failed rationalization (0+ / 0-)

        That also means that under the normal (non-AMT) system, the NH resident is not "subsidizing" the New Yorker or Californian who pays more taxes.  On the contrary, the NH resident is almost certainly free-loading off of the higher level of services in NY and CA, which provide culture, medical care, economic growth, universities, scientific and technological discoveries and so on for the entire country."

        Bullshit o rama. State taxes primarily benefit the residents of such state.

        On the other hand , going back to that couple. THE NH Resident will pay more in federal taxes than the NY/CA Resident (even with equal income), but since the country is federal ,

        the NY/CA WILL BENEFIT from the federal services they paid less or.  

      •  if your idea was carried out (0+ / 0-)

        every state would increase their taxes through the roof since it wouldn't really be a tax increase in reality, just a redistribution of where the tax goes.

    •  as well they maybe should (0+ / 0-)

      200K in NYC or LA or SF Bay area is not 200K in NH.

  •  tips really belong (6+ / 0-)

    to Professor Greenwood.  His writings on corporate law offer an important progressive take on how our society misunderstands the notion of corporate entities. He has also contributed creatively to the discussion of the financial crisis and to the role of a green stimulus to aid in the recovery.

    Dr. Aaron Roland is a family physician in Burlingame, CA.

    by doctoraaron on Fri Apr 10, 2009 at 02:28:03 PM PDT

  •  All I know is AMT has been a trap for this single (5+ / 0-)

    mother taxpayer trying to live a middle class life with an incoe around $100K.  I don't complain about taxes and don't mind paying taxes that have a related benefit (bonds for schools, gas tax, sin taxes, assessments for infrastructure, etc).  It seems very unfair that I get hit with AMT while a couple earning $100K does not. I live in state with 8.75% sale tax on everything but some food items. And we have a high income tax rate, too.  Why should wager earners making less than $150,000 pay AMT?

    •  What is kinda strange is that (0+ / 0-)

      child dependents screw you over but the mortgage deduction does not.  That doesn't really seem fair . . .

    •  multiple traps (4+ / 0-)
      Recommended by:
      VClib, ratador, rhutcheson, Dretutz

      Why should wage earners making any amount pay AMT?

      You can't shelter wages.  They're right there on the W-2 for the IRS to see.  If we want to have folks making $150,000 or whatever pay a higher tax rate, then that's what progressive tax brackets are for in the regular tax code.

      There is an additional reason not touched in the article, besides the fact that the AMT exemption amount has not been indexed, and besides the fact that plain vanilla Schedule A deductions have been deemed tax shelters: the marginal tax rates under the regular tax code have been cut so low that it's simply a much higher probability that for any given taxpayer that their AMT liability will be more than their regular tax liability.  In the end, you pay whichever one is higher.

      As you note, another problem with the AMT exemption amount is that it is not well adjusted for the various filing statuses.  There was never any marriage penalty relief under AMT.  So while you may feel put upon by not being able to take advantage of the exemption amount allowed a married couple, be careful what you wish for because the exemption amount for a married couple is  nowhere close to being 2X that of a single person.  My spouse and I pay a very substantial penalty (I think about $6000) under AMT for being married.

      "They let 'em vote, smoke, and drive -- even put 'em in pants! So what do you get? A -- a Democrat for President!" ~ Faster, Pussycat! Kill! Kill!

      by craiger on Fri Apr 10, 2009 at 03:02:26 PM PDT

      [ Parent ]

    •  How does subsidizing high income people (2+ / 0-)
      Recommended by:
      Dretutz, theindexer

      for having more children benefit society?

  •  Thanks. (0+ / 0-)

    I've wondered why the AMT was not originally indexed, and why the current debate centers just on whether to eliminate the tax altogether or enact a one-time raise of the base amount.

  •  Why shouldn't those that own property pay taxes? (1+ / 0-)
    Recommended by:

    It is those that own property that receive the most benefit from property taxes, and further those that rent cannot benefit at all from this scheme of deducting property taxes from income.

    We should rid ourselves of all tax dodges and the AMT is right on the mark.  IT should be expanded to include the mortgage interest deduction.

  •  AMT is bad bad bad.... (1+ / 0-)
    Recommended by:

    and I can't believe anyone would defend it.

    Many taxpayers who do not have high incomes or participate in any special tax shelter activities now have to pay AMT.

    It was intended to target 155 high-income households that had been eligible for so many tax benefits that they owed little or no income tax under the tax code of the time

  •  IRS's National Taxpayer Advocate's says... (0+ / 0-)

    In 2006, the IRS's National Taxpayer Advocate's report highlighted the AMT as the single most serious problem with the tax code

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