For a couple months now, people have been telling me that Obama’s tax plans will benefit middle class Americans and also people have been showing me this graph where the middle class gets a bigger tax cut, but I am a skeptic of this because I’ve never heard Obama talk about the Alternative Minimum Tax. McCain on the other hand wants to index the Alternative Minimum Tax with inflation. This is actually an important issue that most people do not think about, and here are my thoughts about it.
I have written about the AMT before and pointed out that it is no longer a tax for the rich even though it was designed to be a system to make “the rich” pay taxes. The main problem with the AMT is that it was never indexed for inflation, so what was rich in the 60s is now middle class. Every year congress spends a bunch of money and time to argue about the issue and patch the problem, but noone makes a permanent stand. So how does this relate to Obama’s tax plan? Well, a family pays AMT when their AMT amount is more than their regular income tax. So here is a simple example. Suppose a middle class family has a regular income tax liability of $7000, and an AMT liability of $6500, then they would pay the $7000 regular taxes. Now if Obama gives them a $3000 tax cut and doesn’t change the AMT liability, then their regular tax liability would be $4000, and their AMT liability would be $6500. So they’d still have to pay $6500 under the AMT and the effective tax cut is only $500. McCain originally wanted to repeal the AMT all together, but now says he wants to do a phase out because the AMT is really a revenue machine for the government that is hard to get rid of. So even though McCain’s plan seem to give less tax cuts to middle income families, I think he could save a lot of middle class families money on the AMT by indexing it appropriately. On the other hand, I don’t think Obama’s plan really gives that much tax cuts to middle income families because he does not address the AMT.
How many people will the AMT affect? Well,without any change it is supposed to hit 30 million mostly middle-class taxpayers by 2010. According to this article, The Tax Policy Center estimates that by 2010, 89 percent of married couples with two or more kids and adjusted gross incomes between $75,000 and $100,000 will be subject to the AMT if nothing is done. So even if Obama cuts the regular income tax on these people, it would not matter at all because they will already be paying the AMT.
Finally, I think Obama’s plan to make “donut holes” and tax the rich sounds awfully like creating another AMT system, and I’m very wary of this need to punish the rich with more taxes. Obviously, every new attempt to make the rich pay more just creates more complexity in the tax system and create problems down the road and hurt the middle class. So yes, it looks like Obama will give the middle class a bigger tax break and tax the rich more right now on paper, but I highly doubt that is what will actually happen.
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8 comments ↓
Sounds just like the Bush tax cuts; they gave me tax cuts with one greatly publicized hand. Took almost all of the cuts away with their AMT hand.
A agree, the Obama tax plan is probably not going to work. The rich are already taxed at about 50% when you look at income and investment taxes. If we tax them any more, they will simply move their money out of the country - which I am already doing.
This is the end of the line for the US politicials spending habits. They need to learn to cut back on spending like the rest of us. Their is no more money to tax, borrow or print - that will not further burden the economy.
I think it’s patently unjust, unethical and completely unnecessary to tax income, from whatever source derived, in any way. It equates to theft and makes the people slaves to the government.
It makes no sense to tax businesses either because businesses never actually pay taxes, consumers do. More than half of the total federal tax burden on the middle class, and all of the federal tax burden on the poor, is collected at the register rather than garnished from our wages. It also raises the cost of producing goods in America and this has tranformed us from a post WWII industrial superpower into a 21st century industrial third world country. Nearly everything is mass produced over seas and trillions of investment dollars never inter the country. We’ve lost millions of manufacturing jobs and trillions of dollars in domestic wages. Yet our leaders expect us to believe that income taxes are a necessary evil. Blah!
These are the reasons why the only tax reform plan I support is a federal consumption tax, i.e. the Fair tax. It’s ethical because it completely untax the poor and gives everyone the choice of whether to pay it or not. It’s just because there are no exemptions or loopholes and it doesn’t require any use of force against the people to make them pay it. It’s economically sound because it would untax production and allow America to become the industrial superpower it was before.
I think maybe the reason that Obama’s plan wouldn’t really help those who are affected by AMT is that he doesn’t think they are middle-class. Obama needs to be a little more upfront about his definition of middle class. Whenever he talks about middle class tax cuts and helping working families etc… people get excited. EXCEPT, that many who consider themselves middle class are not middle class by Obama’s definition.
I can’t seem to find it on his site now but he’s said before the income limits for those that would qualify for all these “cuts”. I think it was $70,000 for a family. Or somewhere close to that. Those in areas with a higher cost of living would really suffer. They might make more than $70k a year, but would end up getting taxed more (because he wants to tax the “rich”) and not benefit from the middle class tax cuts. I see this possibly being a huge issue for people that live in places like California.
You’re right Erin, Obama seems to change his definition of “rich” and “middle class” quite a bit. In San Mateo County, $70k a year for a household of 2 or more is under the median income. Average rent is $1700 a month here so there is no way that $70k a year is rich by any definition. Anyway, we will see what happens, but I think a lot of real middle class families will be hurt more by Obama’s plan.
I really agree with what you are saying. After taking a few tax classes I know a lot about the tax system and adding in new provisions to help certain groups and make things simpler always comes back to bite us and cause more problems than we originally had. A phase out of the AMT would be the best way to lower taxes for the middle class.
As all politicians, Obama “Hope Change” is just trying to bribe as many people as he can for their votes. His tax “cuts” won’t help most people and will harm our economy.
I don’t think penalizing the rich is the thing to do - especially when the definition of rich is hard to pin down. Hubby and I are not rich and yet our salaries add up to more than $100k. Rich to someone’s standards, surely. But to ours? No way. Middle class is how we feel and how we live. Cost of living in our area is high, though not as high as Seattle just north of us.
I wish the government would just let me keep my money and get rid of all the ridiculous wasteful spending that isn’t even necessary.
Grrr!!!
You are right — the AMT is the elephant in the room that nobody wants to talk about.
The donut hole thing is a sham, he’ll start it at $250K, then drop it to $200K, then $100K. His good buddy Jon Corzine did exactly that here in NJ. With great fanfare Corzine unveiled a property tax rebate plan for everyone making less than $250K. Two years later the cutoff is $100K. If Obama is elected Corzine is likely to be his Secretary of the Treasury, so he’ll have a lot of input into tax policy.
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