Editorial: Paying to fix an unfair tax
Holiday season is followed too soon by tax season, and that unhappy time threatens to get even bleaker for millions of taxpayers if Congress doesn't get around to fixing the Alternative Minimum Tax.
The AMT made sense when it was adopted in 1969 in response to reports that some of the nation's wealthiest families were managing to avoid paying income taxes altogether. It provides an alternative method of calculating taxes for families above certain income levels, eliminating deductions for children and state and local taxes, among other things.
But the income levels to which the AMT applies were never adjusted for inflation. In 1970, just 20,000 very wealthy taxpayers got caught by the AMT. By last year, rising incomes had made 4 million filers eligible for the AMT. Current projections call for an additional 21 million taxpayers to fall under the AMT next year.
Each year, Congress has applied a Band-Aid to the AMT to keep it from putting a big new burden on upper- and middle-income families, and everyone wants to do that again this year. But reducing the AMT's bite will deprive the federal treasury of $50 billion in projected revenue, and the Democrats have put rules in place requiring Congress replace that money either through spending cuts or revenue increases.
House Democrats have found an attractive target: hedge fund managers, whose annual income can run into the hundreds of millions. Because of a loophole in the tax laws, managers of hedge funds end up paying income taxes in the 15 percent bracket rather than the 35 percent bracket. In effect, Wall Street wheeler-dealers like Henry Kravis -- who brought home $450 million in 2006, columnist David Sirota notes -- are paying a far lower percentage of their income in taxes than the secretaries who work for them.
A bill passed by the House last week would eliminate that loophole to raise money to fix the AMT, but it is meeting resistance in the Senate. The Wall Street gang has turned out a small army of lobbyists to save the loophole, and they are getting support from a White House that operates on the assumption that you are never rich enough to afford a higher tax bill.
The Senate could take up the bill at any time and will, we hope, adopt the House language. But with President Bush threatening a veto, this controversy may well linger. Meanwhile, the IRS has printed its tax forms without the AMT relief. If the law changes, there will be headaches ahead for taxpayers and tax preparers, and millions of refund checks could be delayed.
If it isn't fixed, the AMT will add upwards of $2,000 to the tax bills of millions of people with family incomes less than $100,000. It will hit especially hard in high-income, high-tax states like Massachusetts.
Middle-class families are getting hit from every side with higher costs and flat wages. It would be unconscionable for Congress to increase their tax burden in order to keep billionaires from having to pay their fair share.