Happy tax time, everyone. Don't you wish rates were lower and filling out your returns were less of a hassle?
Well, President Bush may have another gift for you. His next big goal, which he has entrusted to a presidential commission, is ''tax simplification." So: Is George W. Bush the taxpayer's friend?
Bush's new commission is mainly exploring ways to increase tax incentives for savings and to reduce taxes on investment income. That sounds good, but most of us consume most of our income. Like Bush's other tax breaks, these benefits would go mainly to the upper brackets.
There is, however, one big form of tax relief that middle-income families really need and aren't getting. I refer to relief from a little monster called the Alternative Minimum Tax. The AMT is giving more and more of us stealth tax hikes. This is about serious money, possibly yours.
The AMT was enacted in 1970 to prevent very wealthy taxpayers from pyramiding tax deductions and literally paying no tax at all. The idea was that no matter how many deductions you had, you were still required to pay some tax based on an alternative tax schedule. That made sense.
But now, due to inflation coupled with administration tax policies, the AMT is hitting millions of ordinary families, many earning well under $100,000 a year. Within five years, 37 percent of people earning between $50,000 and $75,000 and 73 percent of those with incomes between $75,000 and $100,000 will pay the AMT, compared with less than 3 percent three years ago. Nearly all families earning over $100,000 will pay it, according to a Brookings Institution study.
The AMT reduces the value of the most common middle-class tax deductions, such as the ones for property taxes, state income taxes, medical care, and child exemptions. Adding insult to injury, it leaves intact some of the complex tax shelters used by the wealthiest.
So if you are a home-owning family with children in a state like Massachusetts with high housing costs, you may well get hit this year with a covert tax increase -- via the AMT. For many upper-middle-class families, the AMT tax increase more than wipes out all of Bush's tax cuts.
But Bush has not addressed the AMT tax increase. Why not? Because his administration needs all that revenue to plug the holes in the budget caused by his other tax cuts.
Brookings reports that fixing the AMT's creeping tax hike, which worsens over time, will cost a cool trillion dollars over the next decade. Brookings also finds that the interaction with Bush's tax cuts makes the AMT's bite more severe.
It gets worse. Bush's allies in Congress are also talking about soaking the same upper-middle-class families to pay for the Bush program to partly privatize Social Security. At present, earnings subject to Social Security taxes are capped at $90,000. Republican Senator Lindsey Graham of South Carolina wants to lift the cap so moderately affluent taxpayers pay more payroll taxes.
Reforming the regressive payroll tax is long overdue. It would make sense to add an exemption at the bottom and lift the cap. But Graham's approach, which adds no exemption for the middle class, is bad policy as well as needless policy. Were it not for Bush's proposed raid on Social Security, higher payroll taxes would not be necessary at all.
What about tax simplification? Isn't that a good idea?
Sure, but take a close look at your tax return. What makes it complicated is determining what is deductible. Do we really want to get rid of deductions for mortgage interest, property taxes, health expenses, charitable contributions, IRAs and Keoghs, business expenses, and child exemptions? I'd rather keep things a little complex and get the deductions. Most of them, after all, are legitimate, since these expenses reduce my disposable income and therefore shouldn't be taxed.
It's self-serving nonsense to argue that flattening the rate schedule or sheltering investment income would ''simplify" the tax code. More shelters for the affluent would complicate it, as well as making it less fair to the rest of us. As for a flat rate, think about it: Once you figure out what's taxable, multiplying the rate times the taxable income is the easiest part of doing your taxes. A third-grader could do it. The hard part is sorting out your deductions.
George W. Bush the taxpayer's friend? Sure, if you're a multimillionaire.
Robert Kuttner is co-editor of The American Prospect. This article originally appeared in the Boston Globe.
