After I wrote about how Obama’s tax proposals would cut taxes for many wealthy households, some readers objected that I’d ignored the fact that the alternative minimum tax (AMT) would wipe out any potential tax savings. I had commented that the AMT could, in fact, do just that, but TPC had not yet estimated how many taxpayers would be affected. Research assistant Katie Lim has now generated those estimates and they show, as expected, that the AMT would take the potential tax cut away from many people.

Under Obama’s proposal to raise tax rates on high-income households, 63 percent of single taxpayers who would fall into the expanded part of the 28 percent tax bracket—those with taxable income between $174,900 and $194,350—would get no tax cut in 2011 because of the AMT (see graph). Another 2 percent would get only part of the tax cut as the AMT would claw some but not all of it back. Similarly, 71 percent of single filers getting a regular tax cut in the new 36 percent bracket—taxable income between $194,350 and $226,767—would lose all of that cut to the AMT and another 5 percent would lose some.



For married couples filing jointly, the situation is worse. Nearly 80 percent of those whose marginal tax rate would fall from 33 percent to 28 percent—those with taxable income between $212,900 and $235,750—would get no tax cut in 2011, as would almost 90 percent of those in the 36 percent bracket who would see their taxes fall if it weren’t for the AMT. In addition, between 3 and 4 percent of each group would lose some of the tax cut they would otherwise get.

The AMT's power to erase tax cuts is nothing new. The 2001 tax cuts relied on the AMT to hold down revenue losses. Every tax cut that affects upper-income taxpayers falls partially victim to the AMT. In 2010, the AMT will wipe out an estimated 18 percent of regular income tax cuts enacted since 2001.

Despite the AMT, the proposed “28-percent bracket tax cut” would survive for one-third of affected single taxpayers and one-sixth of affected joint filers. The AMT does a lot of damage but it doesn’t take the cut away from every high-income taxpayer.

This will surprise nobody who follows what is optimistically called the budget process, but the economic stimulus package wending its way through Congress has become the vehicle for an astonishing array of stuff. It’s become even better than emergency supplemental appropriations, which have been used to fund decidedly predictable items, like the decennial census and continuing outlays for the Iraq war (long after the initial shock and awe had worn off).   more »

Barack Obama’s tax plan will either raise $262 billion over the next 10 years or increase the national debt by $2.7 trillion. John McCain would add either $615 billion or $3.6 trillion to the debt.

What’s going on? Don’t everyone turn your computer off at once, but we need to talk about budget baselines.

There is nothing more esoteric, but Obama and McCain have made them hugely important. Trillions of dollars important. In fact, the only way either candidate can establish even a nanobit of fiscal credibility is by dramatically reframing the deficit discussion.

Both want to convince us that the Bush tax cuts will go on forever, even though they are due to expire in 2010, and that the Alternative Minimum Tax mess has already been fixed, although a permanent solution is nowhere in sight. With these helpful assumptions, their trillions of dollars in tax cuts look modest. Both candidates can make it appear as if they are merely moving around a bit of loose change, rather than massively increasing their grandchildren’s debt.

This is nothing more than a fiscal parlor trick. McCain, at least, can argue that he has supported the Bush tax cuts—well, he supported them after he opposed them. Obama has voted time and again against extending them and calls them irresponsible. What is likely to be a strongly Democratic Congress will never vote to sustain them as is. Yet, both Obama and McCain would like us to believe these tax cuts are cast in stone—the fiscal Ten Commandments, if you will—even as they propose to change them.

Neither seems to have noticed that Washington routinely overhauls the tax law every decade or so. When it comes to taxes, change is the status quo.

There is an easy way to cut through this palaver. Forget the baseline. Just think about three numbers: How much would either candidate collect in taxes as a share of the Gross Domestic Product? How much is government likely to spend? And, how much would they have to cut that spending to keep the national debt from ballooning.

TPC estimates that in 2013, Obama would collect revenues of 18.2 percent of GDP. McCain would bring in about 17.8 percent. Spending that year would be about 19.5 percent, according to the Congressional Budget Office, assuming the Iraq war will be winding down.

Thus, Obama would have to cut spending by 1.3% of GDP or $230 billion, to balance the budget in 2013. McCain must find 1.7% of GDP, roughly $300 billion. For context, Bush and the Congress have been battling for years over budget cuts one-tenth that size.

I await word on the candidates’ additional spending cuts. Obama has embraced costly new initiatives for infrastructure, education, health care, and energy, but said little about exactly where he’d cut spending. McCain vows to cut pork, which might get him 5% of what he needs. On the other hand, he is not likely to end the war any time soon.

It is a nice object lesson in how a couple of obscure changes in the tax law can save a few people a lot of money. The IRS has reported that the number of those earning $200,000 or more who paid no taxes rose sharply in 2005. More than 7,300 of these worthies avoided U.S. income tax entirely, two-and-a-half times the year before. About 85,000 paid worldwide taxes of less than 10% of their income.    more »

Howard Gleckman continues to think that temporary tax cuts are no better than permanent ones from the standpoint of enhancing political accountability and fiscal restraint (“Tax Extenders and Fiscal Restraint,” May 22, 2008). So here’s some data.    more »

It was good to hear from University of Virginia tax professor and former Joint Tax Committee boss George Yin. George argues that temporary tax cuts are a good idea because they force Congress to consider the costs and benefits of these measures before renewing them. This reckoning, he says, imposes more political accountability on the system, not less.   more »

The other day, the House Ways & Means Committee routinely approved dozens and dozens of tax breaks. Hardly anyone even noticed.   more »

To celebrate April 15, TPC director Len Burman argued yesterday on TaxVox that today’s income tax “is not all bad” and that “we could do a lot worse.” Well, it may not be all bad, but it is pretty awful. And while we could do worse, we could also do a lot better.   more »

After a brief winter break, the AMT wars have resumed. By next week, the House will pass a fiscal 2009 budget that, among other things, would extend the annual Alternative Minimum Tax patch for another year. The House Budget Committee projects this would keep 20 million mostly middle class taxpayers off the dreaded levy. But, as it did last year, the House will also insist that the $62 billion fix be paid for with offsetting tax hikes.    more »

A News Years Eve, 1965, Time magazine article quoted iconic free-market economist Milton Friedman as saying, "We are all Keynesians now." Friedman later explained that the quote was taken out of context. He meant that even though the language of John Maynard Keynes—famous for recommending fiscal policy as a tool to manage the economy—had pervaded popular consciousness, most people had no idea what this meant.   more »

Congress and the President have finally left town. But they left quite a legacy. Here are our nominees for the five biggest fiscal losers of 2007. The AMT Patch: Sure, Congress finally agreed to keep 20 million middle-class families off the AMT for one more year. But it never paid for the $50 billion temporary fix and ignored proposals to permanently resolve the mess. Just wait until next year, when they do it all again.    more »

To the surprise of no-one, the Senate has blinked in the stand-off over whether Congress will pay for the cost of patching the Alternative Minimum Tax for another year. The question now: Will House Democrats stand firm, or will they too cave in to the big-bucks lobbying campaign of the hedge fund and private equity industry?   more »

An awful lot of Democrats suddenly seem to think that senior citizens are overtaxed. Presidential hopeful Barack Obama wants to exempt seniors making less than $50,000 from paying any federal income tax. House Ways & Means Committee Chairman Charlie Rangel (D-N.Y.) has tucked a new $700 above-the-line deduction for real estate taxes into his proposal to extend Alternative Minimum Tax relief for another year. While Rangel doesn’t say so, seniors who have paid off their mortgages and no longer itemize would be big beneficiaries of the new tax break.    more »

Politicians and policy experts have paid a lot of attention to those taxpayers who would be exempt from the AMT if the levy is fixed or even temporarily patched. But there is another group that has been largely ignored—those who would still pay the tax but owe far less if the law is patched.    more »

In the October 30th Democratic presidential debate, Hillary Clinton was asked what she thought of the tax reform plan offered by House Ways and Means Committee Chairman Charlie Rangel (D-N.Y.). She responded by expressing her deep admiration for the gentleman from New York and explaining that, "I don’t know all the details of what Charlie is recommending." This, of course, is Washington-speak for "I ain't getting anywhere near this soaking puppy."    more »