The Bush Plan: Tax Complification

Does George Bush have a secret plan to impose a flat tax? I can't read
his mind but one thing is clear: Unless the president's tax program adopted last
year is amended, by the end of this decade most of the personal income tax
revenue will come not from the regular, graduated-rate system but from the
essentially flat rate, individual "alternative minimum tax."

This isn't supposed to be how the alternative tax -- first adopted in 1969 to
prevent wealthy people from sheltering all their income from tax -- was supposed
to work. As recently as 1999, only a million taxpayers, almost all of them very
well off, actually paid the alternative tax, which added just $6.5 billion to
federal revenues. But absent legislative change, by the time the Bush tax cuts
are fully in place in 2010, 36 million families will have to fill out the
complicated alternative tax forms, and cough up an extra $140 billion on top of
their regular taxes.

By 2010, some 27 million families, just under a fifth of all taxpayers, will
earn between $100,000 and $500,000 a year (averaging $167,000). Astonishingly, a
staggering 24 million of these families will have to pay the alternative tax.
Even at less elevated income levels, the alternative tax will become a big deal,
affecting more than 10 million of the 29 million families making between $60,000
and $100,000. Altogether, taxpayers subject to the alternative tax will pay
almost two-thirds of all income taxes by 2010.

As its name implies, the alternative tax makes potentially affected taxpayers
figure their taxes twice. First, they do the calculations using the regular
deductions and rates. Then they recompute their taxable income without certain
write-offs, most notably for state and local taxes. After subtracting a flat
exemption, what's left is multiplied by 26 percent (28 percent above $175,000) to
get the alternative tax. Whichever is bigger, the regular or alternative tax, is
what they have to pay.

Why does the alternative tax threaten to engulf the personal income tax? Part
of the reason is that exemptions -- $45,000 for couples and $33,750 for singles
-- haven't been adjusted since 1993. But more important is the fact that Bush
didn't accompany his cuts in the regular income tax rates with corresponding
reductions in the alternative tax rates -- creating a ticking alternative tax
time bomb.

When Bush kicked off his presidential campaign at the end of 1999 by
trumpeting his tax cut plan, I put out an analysis of its likely cost and
(regressive) distribution. Relying on what turned out to be disingenuous tax cut
examples that Bush's campaign circulated, it seemed clear to me that the plan
envisioned lowering the alternative rates along with the regular rates. Bush's
staff bitterly took issue with my analysis, insisting that I had overstated the
tax plan's cost and that the then-governor of Texas had absolutely no intention
of adjusting the alternative tax. OK, fine, was my response, and I put out new
numbers reflecting the "clarification." That change indeed made Bush's plan look
somewhat less expensive, as it meant that people in the upper-income ranges --
excluding the very best-off -- wouldn't actually get most of the tax cuts that
Bush was promising them.

By reducing the apparent cost of their tax plan, however, Bush's staff
inadvertently hoisted themselves (and him) on a different petard. Even after
Bush's tax cuts, the alternative tax will have only minor effects on the very
rich, whose regular rates would usually still be higher than the 28 percent top
alternative rate. So the upshot was that my revised estimates showed that the
richest 1 percent's share of Bush's tax reductions would be even larger.

When Bush's tax plan reached Congress in early 2001, Democrats tried to make
an issue of its vast alternative tax expansion. But the president and his
congressional allies, struggling to squeeze Bush's $2.5 trillion 10-year tax cut
into a $1.3 trillion budget target by manipulating effective dates, had no
interest in seriously addressing an additional problem that would cost well over
$300 billion over the upcoming decade to fix.

As things now stand, the well-intentioned alternative tax is evolving into a
complicated monstrosity that doesn't seriously affect the truly wealthy, but
instead hits hardest upper-middle-income families in states with relatively high
costs for public services and taxes. Tens of millions of American taxpayers face
the prospect of filling out their tax forms twice only to discover that most of
their promised Bush tax cuts were a lie. And so far, our coddle-the-super-rich
president seems unconcerned.

To paraphrase the late economist Herb Stein, if something can't happen, it
probably won't. In that spirit, I predict public pressure to fix the alternative
tax will force a solution in the not-too-distant future. The question is, how do
we pay for it? I'd say that any reasonable answer must include scaling back some
of the unaffordable, unfair Bush tax cuts that created the problem in the first
place.

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