Terry Jeffrey

An insidious creature lurking in the tax code is getting ready to sucker-punch millions of taxpayers when this year turns into next.

 The culprit is the Alternative Minimum Tax (AMT), which Congress brought into being in 1969 as a seemingly harmless means of appeasing popular opinion by taxing a few very rich people who had discovered legal ways to avoid income taxes.

 In January 1969, testifying before Congress's Joint Economic Committee (JEC), LBJ's Treasury Secretary Joseph Barr predicted a "taxpayer revolt" because "in the year 1967, there were 155 tax returns in this country with incomes of over $200,000 a year and 21 returns with incomes of over a million dollars for the year on which the 'taxpayers' paid the U.S. government not one cent of income taxes."

 Congress responded by creating an alternative tax code, stripped of most deductions, which would apply to people whose allowable deductions under the regular income tax reduced their tax bills below a certain level.

 It did not work, however. By 1974, the JEC said in a 2001 report, 244 taxpayers who earned over $200,000 still paid no income tax. Since then, Congress has tried numerous "fixes," creating an AMT so complicated few but tax lawyers fully understand it.

 But for all its tinkering, Congress never did two things: 1) Index to inflation the amount of income exempt from the AMT, or 2) allow people subject to AMT to claim deductions for dependent children and for state and local taxes.

 Because the AMT was not indexed, and because President Bush's tax cuts lowered the regular income-tax rates for middle-income taxpayers, the AMT stood poised to attack the middle class this year. So, last year, Congress "fixed" it again, passing a temporary increase in the amount of income exempt from the tax. This "fix" expires Dec. 31.

 Nina Olsen, the IRS's National Taxpayer Advocate, explained the coming crisis in her annual report to Congress in January. "(T)the exemption amount, after a temporary increase that will expire after 2005, is $45,000 for married taxpayers and $33,700 for most other taxpayers," said Olsen. "As a result, it is now projected that in 2010, 34.8 million individual taxpayers -- or 34 percent of individual filers who pay income tax -- will be subject to the AMT. Among the categories of taxpayers hardest hit, 94 percent of married couples with adjusted gross income (AGI) between $75,000 and $100,000 and with two or more children will owe AMT."

 A January Congressional Budget Office report, "The Budget and Economic Outlook: Fiscal Years 2006 to 2015," made a more startling prediction. "When the provision (that temporarily increases the AMT exemption) ends," says CBO, "the number of returns subject to the AMT is expected to rise, jumping from 4 million returns in 2005 to 19 million the following year. As a result, AMT revenues are projected to increase from $15 billion in fiscal year 2005 to $31 billion in 2006."

 That's the sucker punch.

 It gets worse. CBO says 22.3 million taxpayers will pay $56.2 billion in AMT in 2007; 25.2 million taxpayers will pay $67.8 billion in AMT in 2008; and 28.2 million taxpayers will pay $81.4 billion in AMT in 2009. (See chart below.)

 This brings us to President Bush's budget, which predicts federal receipts will increase from 16.3 percent of GDP in 2004 (the lowest rate in recent decades) to 17.5 percent in 2009 when Bush leaves office, helping bring the deficit down from 3.6 percent of GDP in 2004 to 1.5 percent in 2009. But Office of Management and Budget Director Josh Bolten said at a Feb. 7 press conference that this budget does not include the cost of U.S. operations in Iraq and Afghanistan after this year, or $664 billion in estimated transition financing over 10 years for the president's Social Security reform plan.

 Or any cost for reforming the AMT.

 To his credit, in a Feb. 8 speech to the Detroit Economic Club, President Bush cited the AMT as an unfair tax and one reason he wants comprehensive tax reform. At his Feb. 7 press conference, Bolten said the same. But he also said: "(W)hat the president has asked for is that the secretary of the treasury come forward with a proposal that, overall, looking at the whole tax code, is indeed revenue neutral."
That being the case, here are two questions millions of middle-calls taxpayers ought to be directing at a Republican Congress and a Republican White House: If you are going to spare us from the AMT, does that mean you are going to raise our taxes somewhere else? If you are even tempted to do so, why not instead actually cut government for a change?

 Year ---- Tax Returns Affected by AMT ---- AMT Receipts
  2003 ---- 2.4 million ---- $11.1 billion
 2004 ---- 2.9 million ---- $13.5 billion
 2005 ---- 3.5 million ---- $15.4 billion
 2006 ---- 19.4 million ---- $31 billion
 2007 ---- 22.3 million ---- $56.2 billion
 2008 ---- 25.2 million ---- $67.8 billion
 2009 ---- 28.2 million ---- $81.4 billion
 2010 ---- 31.2 million ---- $95.8 billion

Source: The Congressional Budget Office's" The Budget and Economic Outlook: Fiscal Years 2006 to 2015" (January 2005).

Terry Jeffrey

Terence P. Jeffrey is the editor-in-chief of CNSNews

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