Buy My Book Here

Fox News Ticker

Please check out my new books, "Bullied to Death: Chris Mackney's Kafkaesque Divorce and Sandra Grazzini-Rucki and the World's Last Custody Trial"

Monday, December 24, 2007

The AMT and the Lessons of Taxation and Class Warfare

In 1969, in order to make sure that about 100 fat cats paid their fair share Congress created the Alternative Minimum Tax...

In August 1969 as he was preparing the next year's budget Barr warned that the country faced a taxpayers' revolt. He explained, according to the Washington Post, that in 1967 there were a total of 155 individuals with incomes over $200,000 who did not pay any federal income taxes; twenty of them were millionaires. These individuals successfully used all tax loopholes available to legally evade paying taxes. The revelation attracted wide media attention and led to public shock. As he presented the next annual budget, published in the final weeks of his administration, President Johnson indicated that the problem needed to be addressed...

Unfortunately what started as a tax against fat cats has now begun to affect a large majority of Americans.

For more than three decades, the individual income tax has consisted of two parallel tax systems: the regular tax and an alternative tax that was originally intended to impose taxes on high-income individuals who have no liability under the regular income tax. The stated purpose of the alternative minimum tax (AMT) is to keep taxpayers with high incomes from paying little or no income tax by taking advantage of various preferences in the tax code. The AMT does so by requiring people to recalculate their taxes under alternative rules that include certain forms of income exempt from regular tax and that do not allow specific exemptions, deductions, and other preferences. For most of its existence, the AMT has affected few taxpayers, less than 1 percent in any year before 2000, but its impact is expected to grow rapidly in coming years and affect about one-fifth of all taxpayers in 2010.

In her 2003 report to the Congress, the Internal Revenue Service's National Taxpayer Advocate, Nina Olson, labeled the AMT "the most serious problem faced
by taxpayers."(1)The evolution of the AMT from going after 155 fat cats to one that will hit ten million people if it isn't dealt with is a great example how taxes often morph into something totally from its initial purpose and should be a lesson to all politicians about the dangers of using taxes as a means of fighting class warfare.

Unfortunately, many politicians continue to use taxes as a means of fighting class warfare in hopes of finding themselves on the same side of the table with the majority of Americans against the wealthy. For instance, here is how Hillary Clinton feels about the estate or death tax.
I am more focused on preventing the repeal of the estate tax and returning to what I think are fairer, more effective tax rates for the wealthiest. There may be an argument to be made, which I would be open to but I think you need to look at the entire tax picture. There isn’t any credible argument that the taxes under the Bush administration have gone down disproportionately on high-income investors and earners.”

So what is the so called death tax and why should everyone be concerned when a politician uses it as a means of class warfare?

The estate tax is technically a tax on the transfer of property to others, generally to children of a decedent. It was envisioned to prevent families from passing on huge fortunes and developing a type of royalty in America.
Once again, we have a tax created to make sure that we punish the fat cats. This time they are actually taxed in death. Unfortunately, while the tax death does punish the fat cats it also punishes another class: the savers. Here is a chart of the bottom line levels of an estate's value before it is taxed. For instance, in 2002, any estate worth one million dollars and more would have been taxed. Keep in mind that an estate is everything you own including your home. It is also any retirement that you may have saved up. Let's suppose you saved $100 per month for 40 years and earned an average of 12% on that money. That savings would grow to just over one million dollars after forty years. Someone saving 100 dollars a month is no fat cat and yet they would likely be affected by the estate tax.

Let's look at another tax used by many politicians as a tool in class warfare: the capital gains tax.

A capital gains tax (abbreviated: CGT) is a tax charged on capital gains, the profit realized on the sale of an asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property. Not all countries implement a capital gains tax and most have different rates of taxation for individuals and corporations

.Here is what Barack Obama would like to do to the capital gains tax.

As part of his "Tax Fairness for the Middle Class" plan, Barack Obama is in favor of nearly doubling the capital-gains tax rate from 15 percent to 28 percent. Leaving the fairness issue aside for a moment—as well as the impact of higher taxes on economic growth—the Obama plan could also be called a "Ways in Which Government Can Collect More Taxes to Pay for New Spending" plan, since Democratic candidates are all scrambling to figure out ways to plausibly pay for new healthcare, education, and infrastructure spending if elected.

Keep in mind that the capital gains tax taxes an gain in any long term investment including stocks and real estate. So, what percentage of American households currently own stocks?

Dramatically more Americans own financial assets now than in the recent past. As recently as 1980, only 4.6 million U.S. households owned mutual funds; by 2003 the number was 53.3 million.More than half of American families currently own stocks, bonds or real estate. Nearly half of all U.S. households own stocks or stock mutual funds.
So, when Barack Obama promises to raise the capital gains tax to make the tax system more fair he is actually promising to raise taxes on more than half of American households and growing.Another way in which politicians use taxes as class warfare is through the nebulous word: loophole.
Whether its John Edwards, Barack Obama, orHillary Clinton, the word loophole is used as another tool in fighting class warfare.

Every day, millions of working Americans go to their jobs, play by the rules and hope to make a decent living for themselves and their families. These workers strengthen our middle class and keep oureconomy going. In turn, the vast majority of American employers holdup their end of the bargain by treating their employees fairly.But sadly, many working men and women are not being treated fairly because some businesses are using a little-known tax loophole to avoid paying their fair share. It's workers and American taxpayers who paythe price.

...New York Sen. Hillary Clinton, the front-running Democratic presidential candidate, on Friday urged closing a tax loophole that she said unfairly benefits a few top Wall Street financiers.Clinton called the loophole a "glaring inequity" and joined other lawmakers in a push to raise the tax rate on "carried interest" gains made by senior partners in the booming private equity and hedge fund businesses.

...Sen. John Edwards, D-N.C., told crowds Thursday in Des Moines, Iowa, that he would pay for new programs to benefit the middle class by closing loopholes and tax breaks now benefiting the wealthiest Americans.Remember, the Alternative Minimum Tax itself was created to supposedly close a tax loophole that was also supposed to affect only the wealthiest Americans.

A tax increase speaks for itself. (res ipsa loquitur) The problem is that many a politician have used tax increases as some sort of tool to appeal to emotions. We have a country of nearly half a billion people and at any given time there are millions who are less successful than they would like to be. Those millions can almost always be quantified by someone and put into percentages. The unsuccessful almost always have a resentment toward those at the top. Politicians see opportunities in appealing to such emotions. By increasing taxes that they see as primarily applying to the successful, they seek to score points with the masses who are largely less successful. Unfortunately, the reality of tax policy is almost never in line with the perception that is created by politicians.

Whether it is the AMT, the capital gains tax, the estate tax, or the nebulous tax loopholes, these, like most taxes, almost always end working the same: by affecting the majority of people.


Brian Walters said...

I think you need to take a look at Fred Thompson's tax relief plan where he says the alternative minimum tax should be abolished and we should instituted a much simpler flat tax. Check it out here:

mike volpe said...

Abolishing the AMT goes without saying, however the rub is that abolishing it is not as simple as it sounds. The AMT has now become a vital source of revenue. Merely abolishing it may or may not be feasable.

The problems with abolishing the AMT are actually the subject of my follow up piece...

I know the flat tax and it is interesting. I don't know how realistic it will be to implement. Huckabee also favors the flat tax I should point out.

Brian Walters said...


Huckabee certainly does NOT favor a flat tax! He wants a "fair" tax which is something COMPLETELY different.

A "fair" tax is a nation wide sales tax that Huckabee says would be 23% but most economists say it would have to be closer to 35-45% to account for all the lost revenue from the abolition of the income tax and the IRS. That is what Huckabee wants and most economists call it a crackpot plan!

The "fair" tax would absolutely KILL the middle class and the poor. Try telling a poor person, "hey, still don't have to pay income taxes, but now we're going to lay the screws to you and make you pay 23% sales tax instead of 5.5% (Green Bay, WI)!"

I hope you check out Fred's tax plan. It has been widely praised by The Club for Growth, the Wall Street Journal, and many tax groups.

Fred Thompson has the best and ONLY tax plan out there.

mike volpe said...

Maybe, I get the two confused. I don't much care what most economists say, and both plans have a lot of difficulty being implemented.

I have had this debate elsewhere about whether or not the increased sales tax would kill the middle class. I don't buy it and I don't buy it for a second. Eliminating a tax on up to one quarter of your income, which is where the middle class is at, doesn't kill you, it helps you. It maybe that the really poor might be hurt though I believe Huckabee has drawn up a plan for that as well, however I don't buy the claim for one second that the middle class would be hurt by the fair tax.

Brian Walters said...

Do you realize that to implement the "fair" tax that the IRS would have to be abolished? That is Huckabee's big talking point. That he would abolish the IRS. However, he always conveniently leaves out that his plan would create another bureau and therefore it wouldn't cut down anything like he says.

Even if it wasn't insane to think that he could just instantly abolish the IRS (which is completely incompetent to think it could happen) the loss of the income taxes would indeed need to be higher than 23%! The reason? The reason is because the people who pay most of the income taxes are the rich and not the middle class. So to make up for the insane amounts of money that come from people who make millions and who are taxed at a much higher rate there would need to be a much higher sales tax than 23% nationally.

It is a crackpot plan and is laughed at by any credible economist no matter if you put much value into what they say or not. This is a very basic ideology.

I don't know if you're a Huckabee supporter or not but the guy is a snake oil salesman. I've never, and I mean never, seen a politician lie as much as Huckabee does...well, maybe only eclipsed by another Governor from Arkansas and I think you know who that was...

mike volpe said...

First, I am a Rudy supporter, and I just wrote about all you Fred supporters and you prove my point.

To Thompson supporters like you, everyone is a snake oil salesman short of Thompson.

Fine. The way I see the fair tax is from the Yogi Berra quote,

"in theory there's no difference between theory and practice but in practice there is"

I believe that in theory the fair tax would work. It is absurd to claim that you can't even see it work in theory. The trick is applying it in the real world.

Again, to say that someone loses even though the tax on their income is eliminated is absurd and unfair and demagoguery.

People aren't forced to buy. They are forced to earn a living. Thus, if you tax their earning that is a forced tax. If you tax their big screen that is a voluntary tax. There is plenty that makes sense in the fair tax. You have turned Thompson into the savior and since he is down in the polls you have, along with your colleagues, set your long knives out on anyone that he is competing against.

I am not a Huckabee supporter however I have found the intense attacks on him by members of his own party to be obscene and you are just one of many.

Brian Walters said...

You're right, there are only two candidates out there that aren't snake oil salesmen and those two are McCain and Thompson. Just take a look at! They are the two who are either never mentioned or rarely are ever mentioned for embellishing the truth or flat out lying like the others are.

I challenge you to bring up something Fred has lied or fibbed about! He doesn't need to because he's a straight shooter. I don't want someone like Giuliani who embellishes every statistic he ever gives, or Romney who doesn't know what the heck he believes as it depends on where he's standing, or Huckabee who just flat out lies and then plays the religion card. I want someone who will tell the truth and not have to sugar coat everything or try and be something they are not! Why do you think Americans are so leary of believing candidates in this day and age? They don't know what they can believe anything coming out of their mouths. So you can say what you want about us Fred Thompson supporters. We don't want snake oil salesmen and that's what the other candidates are.

You're right, the "fair" tax is basically a consumption tax which is another reason why it's a joke. Just because some people have a little extra money doesn't mean they are going to spend absurd amounts of money for products that would be required because of the "fair" tax. Instead of paying $20,000 for a vehicle plus a little tax making it around $20,500 or so they would now have to pay $25,000-$28,000 for that vehicle. A consumption tax AKA the "fair" tax would absolutely KILL the economy because people wouldn't spend money on anything but necessities.

It's a crackpot system.

Really, I don't mind Giuliani and like him much better than Romney, Huckabee, or any of the others less Thompson and McCain. However, I wish he would stop embellishing everything. I wish he would stop mentioning himself in the same breath as Ronald Reagan because it is the biggest insult to everything Ronald Reagan stood for Giuliani to put the two in the same breath. I don't agree with his stances on abortion and gay marriage but other than that I don't mind his policy positions. If he is elected I will certainly vote for him and hope he sticks it right down Hillary's throat like I know he's fully capable of doing. However, he isn't my first or second choice.

Brian Walters said...

Your article on Fred Thompson supporters is misguided at best also.

You're right, the media doesn't form the views of their viewers at all. Riiiiight. If I had a penny for the number of times I've talked to family members about Fred and they said to me "I never even hear about him anymore" I'd have a substantial amount of pennies.

I'm not into activist media and from the looks of your "hit piece" it is clear you must be one of them. You don't report a story, you push your view on your readers instead.

It's a sad turn "journalism" has taken.

mike volpe said...

A few things...

I will answer both responses at once since I didn't get a chance to get to a computer till now.

Again, Thompson maybe a straight shooter but that is because he has nothing to defend. It is easy to be a straight shooter when you HAVE NO RECORD. He hasn't done anything and thus he nothing to be crooked about.

I don't know why is suddenly the gospel on truth, however I will believe my own eyes. New York was a mess when Rudy came in and it was one of the nicest cities when he left. If claims that is wrong then they are the ones spinning. What exactly has Thompson done that is even in the same zip code as Rudy's accomplishments in NYC.

As for the fair tax, it is just completely against all logic to say that people will spend less with more money in their pockets. I don't know anyone that spends less when they have more money. To claim that after a tax cut people will then only spend on essentials is the height of absurdity.

As to my Thompson article, it is ironic and absurd for you to call everyone short of McCain and Thompson a snake oil salesman and then turn around and say I wrote a hit piece. You don't think that calling a candidate a snake oil salesman, let alone branding the entire bunch, has elements of a hit piece.

Furthermore, if I wrote a hit piece it wasn't about Thompson but about his supporters like you. I didn't spend much time on the man himself except to say that he is totally unqualified for the highest office in the land which I firmly believe given his bare resume that he is. I spent most of my piece disecting the hit pieces directed at other candidates by elements of the right blogosphere. I am member of that sphere and I know its writings well. You can call it a hit piece however I stand by what I said.

Finally, if a candidate is being totally unnoticed, are you really claiming that none of the fault lies in the candidate himself. Who takes the bulk of the blame for a candidates obscurity in the middle of a Presidential campaign, if not the candidate themself.

You also mentioned mockingly that the media does have influence. I never said the media but rather MSM, which is the mainstream media, which has negative influence if any at all on who Republicans select.

Huckabee surged in the polls with little money and less exposure. Somehow this little known candidate from Arkansas made a huge splash without much coverage from the MSM. He didn't make excuses like you are for Thompson now.

Brian Walters said...

It is clear you are a media sheep.

mike volpe said...

I will take that ad hominen attack as evidence that I won the debate.

All ad hominem attack that are backed up by nothing, as your were, are such evidence. For if you had something intelligent to say you would have.

Calling me names is something a third grader would do. The cheap tactic is a sign that you have nothing left as far as substance and thus resort to that childish tactic. It is all right, many have debated me and most find that no one loves to argue as much as me.