For years I’ve been railing about the “stealth tax” known as the Alternative Minimum Tax (AMT). AMT is the tax that blindsides most people who end up owing it because the vast majority of Americans don’t even know it exists until it’s too late.
The National Taxpayer Advocate, Nina Olson, has also railed against the AMT. In her annual reports to Congress, the NTA has called for the repeal of the AMT consistently for the past 10 years.
Earlier this year the Congressional Research Service joined the NTA in warning more people will be clobbered by the tax unless something is done—and soon.
Millionaires to Middle-Earners
The tax, created in 1969 to require a handful of wealthy persons to pay a minimum tax, now hits millions of middle-income earners. The IRS estimates 39 percent of married couples with children will be paying the AMT in 2010.
This has happened largely because the AMT exemption amounts have not been indexed for inflation. As wages rise because of inflation, taxpayers get pushed into the AMT. Congress has passed temporary “patches” to keep new taxpayers from being affected, but it’s not enough.
Don’t look for Congress to do the right thing regarding the AMT, which would be to repeal the tax entirely. The federal government is too desperate for money. And that’s exactly what the President stated recently.
‘Deficit, Debt Too Big’
In a town hall meeting in Buffalo, Obama told taxpayers because “the nation’s deficit and debt are too big,” the tax cannot be eliminated. He said elimination “would create this huge hole in the budget.”
I have news for the President. There’s already a huge hole in the budget. Federal spending that is out of control created the hole.
In just the past two budget cycles, Congress created and the President authorized budgets in deficit to the tune of $1.3 trillion and $1.41 trillion, respectively. And that’s just the beginning. Next year’s budget deficit is projected to be even worse, at $1.47 trillion.
In addition, Congress created and the President authorized the establishment of a new federal entitlement program (health care) that promises to dwarf the spending of nearly every other entitlement program.
Government’s Money, Not Yours
Not only did Obama vow to keep taxes from being cut through AMT reform, he also guaranteed taxes will go up across the board. This came in the form of a shot he took at so-called “tax expenditures” in the tax code.
“Tax expenditure” is a phrase tax theologians use to describe a tax deduction. You see, in the mind of the typical tax theologian, a tax deduction is not a mechanism that allows you to keep more of your money. On the contrary. A “tax expenditure” means the government is spending its money by allowing you to take advantage of a deduction.
Think of it this way (since this is how tax theologians think of it): All money is “government money.” When the government allows you to keep some of its money by reducing your tax hit through a deduction, the government has actually incurred an “expense” known as a “tax expenditure.” The more “tax expenditures” there are in the law, the less money the government gets.
That’s why politicians often say, “We can’t afford this tax cut.” It’s as if they are spending their own money to do you a favor.
Tax Theology Sacrilege
Because the idea of the government getting less money is sacrilegious to tax theologians, they constantly seek ways to reduce these “tax expenditures.” Put another way, they work to cut legitimate tax deductions from the tax code so the net effect is that your taxes go up.
They sell this idea to the public by presenting the deductions as “loopholes,” or means by which “rich people” illegitimately get out of paying taxes. This way, Jane and Joe America believe stopping the tax cuts is a way to get further into the pockets of those rich people who don’t pay their fair share.
Tax theologians don’t tell you that the “rich” already pay such a large percentage of the income tax that any further “loophole” closing falls squarely into the laps of the average American. For example, “tax expenditures” that have from time to time been on the chopping block, depending upon the political climate, include the deductions for mortgage interest, charitable contributions, and IRA/401(k) contributions. How’s that for closing “loopholes?”
Loopholes for None
If you think this “loophole” closing will be a carefully crafted exercise targeted at just a select few exotic deductions favored only by the very rich, the President’s statements contradict that idea.
He stated, “We’ve got to take out a hose and just eliminate these tax loopholes that are out there.”
The fact is, the vast majority of exotic tax loopholes were eliminated long ago. That was the selling point for creating the AMT in the first place—more than three decades ago.
The President is really saying he wants more of your money. He just wants to make it look like he’s not actually attacking you to get it.
Dan Pilla ([email protected]) is the best-selling author of 11 books on taxes and dealing with the IRS, including The IRS Problem Solver and How to Get Tax Amnesty. He runs TaxHelpOnline.com and publishes the Pilla Talks Taxes electronic newsletter.