Wall Street Journal Editorial Mischaracterizes AMT Woes

We’ve noted before that the Journal’s editorial pages are not the place to go if you want reality-based commentary. This piece, “Wall Street Journal AMT Editorial,” from Linda Beale on ataxingmanner (which came to our attention via Mark Thoma’s Economist’s View) dissects a recent WSJ editorial on the alternative minimum tax, or AMT.

For readers not in the US, the AMT has become contentious of late. It’s a rather complicated formula that looks at sources of income and deductions and comes up with an “alternative,” hence the name, calculation of federal income tax due. You pay the higher of the tax as calculated under normal means (income less deductions and exemptions) and AMT. The idea was to prevent rich people from using tax shelters and other mechanisms from shielding their income. But now the AMT is hitting middle class people who have a lot of legitimate deductions (state and local income taxes, mortgage interest, and medical.

Beale’s big beef is that the Journal tries to pin the blame for the current AMT creep into the middle classes on Clinton, when it’s not hard to make the case that if anyone is culpable, it’s Bush:

The Wall Street Journal is an important source of financial news, but people should not expect to read its editorial page without their spin antennae turned on. Today’s editorial on the AMT is a good example of the way the Journal does partisan (and misleading) spin. It’s titled “Bill Clinton’s AMT Bomb,” Wall Street Journal, Feb. 23, 2007, at A10 (available online only to those who pay).

What’s wrong with it?

First, it lays the continuing downward creep of the AMT at Clinton’s feet, in spite of the fact that the AMT downward creep is directly related to two things–the lack of indexation (which has not yet been passed by any Congress or pushed by any president) and the nature of the Bush tax cuts (they lowered top rates for the regular tax so much that it made many more taxpayers subject to the AMT, and they intentionally did not lower the AMT rates).

The Journal blames Clinton for the AMT because the Clinton administration did the sensible thing–when top rates were raised, the AMT rates were raised as well so that the AMT could continue to function parallel to the regular system the way it was intended to. (Clinton also increased the AMT exemption–permanently, unlike the Bush Congress.) If the Bush administration had applied the same logic that the Clinton administration applied, it would have lowered the AMT rates (and again increased the exemption permanently, because of inflation) when it lowered the regular tax rates, so that the AMT would have continued to function parallel to the regular system in the way it was intended to.

That would have prevented any problem of the AMT slipping down into the middle class other than from the lack of indexation (which nobody has yet really dealt with). But that would have also forced the Bush administration to acknowledge that the Bush tax cuts were far deeper revenue reductions (and far more beneficial to wealthy Americans) than it apparently wanted to admit. So it didn’t do the aboveboard thing and instead decided to argue that it could take care of the AMT later…..

Second, the Journal blames Clinton for not indexing the AMT exemption to inflation. That’s like the pot calling the kettle black. At some point, someone should decide just how far down the AMT is targeted, set the exemption appropriately, and then index it for inflation. But the Bush Congress didn’t do anything but a year-by-year “fix” to the exemption amount, and even then only when it was pushed to do so. Why does the Bush-supporting and Clinton-bashing Journal pick out the failure of the 1993 changes to index the amount as the time it didn’t get indexed, instead of the 2001, 2003, and other changes during the Bush administration?

Third, it suggests that “average middle-class families” got about a $2000 per family deduction from the Bush tax cuts. That’s a misuse of averages that lumps together lots of families in the $200 to $500 thousand range–ie, families making considerably more than the $45,000 that is the typical middle class salary. (And remember that the amount of AMT paid by taxpayers at the lower income brackets is considerably less than the amount paid by those in the upper brackets, even when they pay AMT.) Yes, the AMT will reach down as low as $75,000 this year without a fix to the exemption amount, but that is still a good bit more than most Americans have.

Fourth, the Journal calls the AMT a “liberal monster that was created in the name of soaking the rich but has now come back to swallow the middle class.” Again, another liberal-bashing spin. The AMT was never intended to “soak the rich”–unless (like the Wall Street Journal, apparently) you happen to think that having wealthy people pay at least some small percentage of their income in tax every year is “soaking” them. The AMT was originally meant to make sure that very rich people couldn’t arrange the type and timing of income in such a way as to pay no tax at all, and over time Congress saw that it also provided a way to ensure that people with considerable income couldn’t over-use various incentives built into the tax system (certain kinds of tax exempt income, ability to defer wage income received in the form of stock option grants, etc.) that, taken in the aggregate, left them paying almost no tax. In other words, the AMT does fairly well the purpose for which it has been intended for decades, ever since Congress specifically enlarged its scope beyond just getting the rich who weren’t paying any regular tax at all. (It would do even better in achieving its purpose if the capital gains preferential rate were again made an AMT preference.)

Fifth, the Journal’s view that the AMT should just be repealed without attention to its cost (at least $600 billion over ten years, and perhaps more than a trillion dollars, when the financing of the national debt to cover the lost revenues is taken into account), without regard to the other uses we might have for those funds is not the way tax decisions should ever be made. Tax decisions are enormously important, because they go to the core of what we are as a democratic nation and what we care about–including how much we care about the downtrodden amongst us. They require open deliberation that considers the often difficult tradeoffs.

So what is the Journal’s logic? The editorial board appears to like Senator Grassley’s comment that “This tax was never meant to tax the middle class, so why should we count it as a revenue loss when we make sure they don’t have to pay it?” Besides the fact that the statement is simply wrong, can you imagine what the Journal would say if a Senator with a more progressive bent were to suggest that the federal income tax system was not meant to tax anyone but the rich, so in deliberating tax provisions we should just disregard any revenue losses from eliminating all payroll and income taxes on those making below $75,000?

Just a note. The Journal scarcastically refers to proposals to raise taxes on CEOs in order to pay for adjusting the AMT to protect the (true) middle class. (Those officers in publicly held companies, remember, average about 400 times the annual income of workers in their companies.) But the same editorial board thought it was completely reasonable for businesses (and a lot of them not so small) to receive even more tax cuts than the largesse they have already been handed out over the last year in return for their cost to implement a tiny, long-delayed, and much needed increase in the minimum wage (which in too many cases was zero, since state wage laws or local markets already require wages over the proposed minimum). It illustrates a point I’ve made several times in this blog. When one talks about taxes and money, changes will almost always be redistributive, but the directionality is what matters. Redistribution upwards, in fact, is the norm, as in the home mortgage interest deduction and many other tax expenditures in the Code that favor those in the higher income brackets, though most who support those kinds of changes talk a lot about the “free” market. Redistribution downwards, in favor of those who don’t have much, is hard to do in an economy that is so dominated by huge multinational enterprises with enormous power and in which populist and progressive sentiments are often treated as naive and sentimental.

For a good review of the AMT issues, you can also turn to the February 22, 2007 entry “White House May Be Negotiating With Itself on Alternative Minimum Tax,” on Talking Taxes, the tax blog connected with Citizens for Tax Justice. (Regretably, these entries are all set to the general URL for the blog, so after today you’ll have to go to the right hand column and click on the title to pull up this entry directly.)

In short:

1. The 2001-2006 tax cuts passed by the Republican-dominated Congress and the Bush Administration were packaged with no plan to repeal the AMT, since AMT revenues were needed to pretend that the tax cut package was considerably cheaper than it was known to be.
2. The AMT’s reach is due to a combination of lack of inflation adjustment and the Bush tax law changes, which had a predicted and quantifiable impact on the number of taxpayers paying AMT taxes and the distributional impact of the overall tax package.
3. To suggest, as the Wall Street Journal editorial does, that the cost of repeal of the AMT should not be taken into account because the AMT was never intended to tax who it taxes is utter nonsense. Congress fully intended for the AMT to continue to operate, or it would have repealed the AMT as part of its tax cut packages in 2001 or 2003. It gave priority to cutting the capital gains taxes on the wealthiest Americans, and not to preventing the AMT from creeping lower down into the middle income brackets than it would otherwise have done.
4. Whatever it does with the AMT, Congress should do it through an open, deliberative process that considers the necessary tradeoffs.

I’d ask Congress to consider some of the following questions. Do we want to continue to push the burden of taxation down onto ordinary Americans (and by ordinary, I mean those with gross incomes of less than $150,000) whose primary source of income is wages from their work, or do we want those Americans with extensive wealth and extensive income from stocks and other financial instruments to pay their fair share? Do we want to protect ordinary Americans from the complexities of multiple calculations or do we want to use “simplification” arguments as just another way to decrease tax revenues paid in by those in the higher income distributions? Do we want to destroy the safety net developed by progressive legislators over the last century, or do we want to ensure that Americans of all ethnicities, races and classes receive adequate food, shelter, medical care and education through publicly sustained institutions?

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