Alan Reynolds

Those who have always opposed all reductions in tax rates on dividends or capital gains believe they have schemed-up a way to cut a one-sided deal. The latest effort appeared in a New York Times piece by David Cay Johnston, "With Tax Break Expired, Middle Class Faces a Greater Burden for 2006."

The tax break was that an extra $58,000 could be excluded from last year's joint return before the 26 percent Alternative Minimum Tax (AMT) might apply to those with a lot of deductions. That "patch" trimmed revenue by $15 billion last year -- less than seven-tenths of one percent.

The idea of trading another AMT patch for a much higher tax on dividends and capital gains has long been a dream of The Tax Policy Center (TPC) -- a collaboration of the Brookings Institution and Urban Institute, two nonpartisan think tanks that always happen to be short of Republicans.

The newest proposed tax deal goes something like this: If obstinate congressional Republicans would simply agree to tax dividends at the same 35 percent rate as salaries, and hike the capital gains tax to 20 percent, then the generous folks on the other side of the aisle might agree to do something (but not much) about the Alternative Minimum Tax (AMT).

To sell such a lousy deal requires a few lousy arguments. The tax traders' most pathetic argument has been to say that millions would be better off with an across-the-board increase in marginal tax rates because then they'd owe so much more in regular tax that they needn't be troubled by the AMT.

As the TPC put it, "If the tax cuts were made permanent, a projected 44 million taxpayers would face the AMT in 2014. In contrast, if the tax cuts are allowed to expire as scheduled, 'only' 26 million would face the AMT in 2014." That means 18 million taxpayers (44 minus 26) would owe so much more in ordinary income tax that the AMT would be comparatively low (and a much better deal than the one they'd be stuck with).

On the other hand, the tax traders' most clever marketing ploy has been to depict the AMT as anti-family. Johnston shamelessly quotes someone from "a politically influential Christian ministry" griping about the AMT punishing the nuclear family. It does, but only because its Democratic architects designed it that way. The anti-family aspect would be easy to fix by removing personal exemptions from "preference items" subject to the tax. That would trim AMT revenues by just 22 percent -- small change.


Alan Reynolds

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