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 toprevent wealthy people from sheltering all their income from tax -- was supposedto work. As recently as 1999, only a million taxpayers, almost all of them verywell off, actually paid the alternative tax, which added just $6.5 billion tofederal revenues. But absent legislative change, by the time the Bush tax cutsare fully in place in 2010, 36 million families will have to fill out thecomplicated alternative tax forms, and cough up an extra $140 billion on top oftheir regular taxes.
By 2010, some 27 million families, just under a fifth of all taxpayers, willearn between $100,000 and $500,000 a year (averaging $167,000). Astonishingly, astaggering 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 $60,000and $100,000. Altogether, taxpayers subject to the alternative tax will payalmost two-thirds of all income taxes by 2010.
As its name implies, the alternative tax makes potentially affected taxpayersfigure their taxes twice. First, they do the calculations using the regulardeductions and rates. Then they recompute their taxable income without certainwrite-offs, most notably for state and local taxes. After subtracting a flatexemption, what's left is multiplied by 26 percent (28 percent above $175,000) toget the alternative tax. Whichever is bigger, the regular or alternative tax, iswhat they have to pay.
Why does the alternative tax threaten to engulf the personal income tax? Partof 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 Bushdidn't accompany his cuts in the regular income tax rates with correspondingreductions in the alternative tax rates -- creating a ticking alternative taxtime bomb.
When Bush kicked off his presidential campaign at the end of 1999 bytrumpeting 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 cutexamples that Bush's campaign circulated, it seemed clear to me that the planenvisioned lowering the alternative rates along with the regular rates. Bush'sstaff bitterly took issue with my analysis, insisting that I had overstated thetax plan's cost and that the then-governor of Texas had absolutely no intentionof adjusting the alternative tax. OK, fine, was my response, and I put out newnumbers reflecting the "clarification." That change indeed made Bush's plan looksomewhat 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 thatBush was promising them.
By reducing the apparent cost of their tax plan, however, Bush's staffinadvertently hoisted themselves (and him) on a different petard. Even afterBush's tax cuts, the alternative tax will have only minor effects on the veryrich, whose regular rates would usually still be higher than the 28 percent topalternative rate. So the upshot was that my revised estimates showed that therichest 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 makean issue of its vast alternative tax expansion. But the president and hiscongressional allies, struggling to squeeze Bush's $2.5 trillion 10-year tax cutinto a $1.3 trillion budget target by manipulating effective dates, had nointerest 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 acomplicated monstrosity that doesn't seriously affect the truly wealthy, butinstead hits hardest upper-middle-income families in states with relatively highcosts for public services and taxes. Tens of millions of American taxpayers facethe prospect of filling out their tax forms twice only to discover that most oftheir promised Bush tax cuts were a lie. And so far, our coddle-the-super-richpresident seems unconcerned.
To paraphrase the late economist Herb Stein, if something can't happen, itprobably won't. In that spirit, I predict public pressure to fix the alternativetax will force a solution in the not-too-distant future. The question is, how dowe pay for it? I'd say that any reasonable answer must include scaling back someof the unaffordable, unfair Bush tax cuts that created the problem in the firstplace.
