Tax Time Bombs

I feel like taking a little break — two or three days —from international taxation.

Fortunately, there are even more important — at least in the medium term — tax topics. The most pressing tax issues today are presented by two time bombs in current law: (i) the sunset of the Bush tax cuts and (ii) the metastasis of the alternative minimum tax.

A few of President Bush's tax cuts for the middle class phase down starting at the end of this year. (Yes, there is an over $11 billion a year tax increase, born mostly by the middle class, that takes effect in January. The politics leading to this are discussed in Michael Froomkin's post, It's Cynicism All the Way Down, on July 22, below.) All of Bush's cuts in regular taxes expire at the end of 2010. The capital gains tax cuts expire at the end of 2008. (Dishonest budgeting is a topic for another day.) To extend all of these cuts from when they expire through the end of 2014 would cost at least $1.2 trillion. REALLY! $1.2 TRILLION! And breathtaking deficits are projected without an extension. This speaks for itself. (Or at least the silent political campaigns must so think.)

The second time bomb is the individual alternative minimum tax. This tax (in its current form) was enacted in 1986 to limit tax sheltering by the rich, but now is a misguided tax on the upper middle class, particularly those who live in states with high state and local taxes. For a good recent CBO report on this, go to CBO AMT Report . Bush's tax cuts (although not the revenue numbers noted above) contained some minimum tax relief, but it sunsets at the end of this year. Historically, less than 1% of all individual taxpayers paid minimum tax. Next year, 11.6 million individual taxpayers (about 13% of all such taxpayers) will pay over $35 billion in minimum tax. These numbers will almost double in the following decade. Something must be done, but there is no money…

My numbers come from the CBO, the Joint Tax Committee Staff, and the Tax Policy Center.

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4 Responses to Tax Time Bombs

  1. Is this one of the years where the highest tax rate and the inheritance tax rates are lowered again?

    If so, a good compromise might be to eliminate those tax cuts in order to maintain the tax breaks for the poor, beleaguered, upper-middle class.

  2. GeorgeMundstock says:

    Not nearly enuff money in the estate tax to help us out much. (Yes, statistically, even a mere professor is UMC in a post-Reagan USA.)

  3. Tom says:

    I’ll skip the discussion on the tax cuts for now and just comment on the AMT. The AMT always was and still is a political scam: It takes away with one hand what the other hand dispenses all too freely. If accelerated depreciation, percentage depletion, tax-exempt interest from IDBs, or state and local tax deductions, for example, are not acceptable as tax expenditures, then reduce or repeal them. Once again, politicians try too hard to please everyone with the AMT: this time, both the beneficiaries and the critics of tax preference items. Maybe someone should give some thought to whether we really need to complicate the income tax so much for so little. Again, Congress should change the underlying preference items to reduce the tax benefits (and thus raise revenues) instead of creating another layer of income taxes under the guise of the AMT. In addition, if Congress is truly concerned that the high income taxpayers will not pay enough income tax without an AMT, then Congress should increase the marginal rates.

  4. Mellifluous says:

    The one time we had to pay AMT it was found by a tax preparer which we made the mistake of consulting (we probably would have skated on it because we had no idea it would be in play.) The explanation seemed to be that my wife, who was diabetic, on dialysis, had heart problems with bypass surgery, high blood pressure, etc., had too many medical deductions. Our combined AGR was below 100K. Go figure.

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