The individual alternative minimum tax, signed into law by President Nixon in 1969 following a report by The Washington Post that 155 individuals with annual incomes of more than $200,000 ($1.1 million in today’s dollars) had paid no taxes at all, came at a time when the federal government faced belt tightening on a number of fronts in order to pay for the Vietnam War. The AMT was intended to ensure that wealthy individuals would pay at least some tax no matter how effectively their accountants sheltered their income from federal tax laws.
Unfortunately, the laws governing the AMT were not altered as other portions of the tax code changed. Most importantly, no adjustments were made to account for the more than 500 percent increase in prices that has occurred since the AMT became law. Wages, of course, have risen to match inflation, but the AMT is not indexed to inflation.
By the time President Bush was sworn into office it was clear that the AMT would start imposing an increasingly heavy burden on many middle-income families. Congressional Democrats proposed that AMT reform be included as part of the massive tax cut packages that Bush began to push through Congress in the spring of 2001.
The White House and the congressional leadership at the time refused, electing instead to cut the maximum tax rates on the highest-income Americans and eliminate the estate tax. The bill lowered regular income tax liabilities without properly adjusting the AMT, the result being that the AMT would no longer be a significant burden on the wealthy and instead would target the middle class almost exclusively.
When the Conference Report for the 2001 tax bill came back to the House floor in late May of that year, Rep. Brad Sherman (D-CA), who worked as a tax accountant before coming to Congress, took the floor to point out what had happened in the rush to give huge breaks to the richest Americans:
“In years to come, people will look at the back of their tax returns and they will see a huge AMT, alternative minimum tax, added to their tax bill. They will remember a bill that was written at midnight, and they will believe that all the tax benefits went to those less worthy and more wealthy than themselves. They will be right. Look at what this bill does to the upper middle class. It throws them into the alternative minimum tax.”
By 2004, federal revenue collections had dropped as a percentage of gross domestic product to 16.3 percent from 20.9 percent, a fall that equated to more than half a trillion in year in lost revenues. But the AMT was left fundamentally unchanged. The New York Times pointed out in an editorial yesterday:
“As a result, only an estimated 3 percent of alternative-tax payers for 2006 are tax-sheltering multimillionaires. Most people who owe the tax make between $200,000 and $500,000; nearly a fourth make $75,000 to $200,000. In those groups, the most common breaks are write-offs for children and for state and local taxes—hardly aggressive tax shelters.”
If middle-class Americans are angry about the taxes they are paying, they have every right to be. Americans who serve in the military are being called on by this White House to place their lives and physical well-being on the line every day. The middle class is being asked to shoulder a huge share of the economic cost of that policy. We have less and less money to pay for our schools or even pay for decent medical treatment for those who are wounded in the course of their service.
It turns out President Bush’s vision of “family values” is just fine if you happen to be in the right family.
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