Study Says Middle Class to Lose Much of Bush Tax Cut's Benefit
The New York Times
September 19, 2002
" Under the alternative minimum tax system, many deductions
are denied, including those for children, the taxpayers
themselves and for state and
local taxes. At that point, taxes are
calculated at rates of 26 to 35 percent.
"We're talking about a really nasty marriage penalty,"
Mr. Burman said. "You are 25 times to 30 times more
likely to be on the alternative minimum
tax if you are married rather than single."
By DAVID CAY JOHNSTON
WASHINGTON, Sept. 18 - Nearly all middle- and upper-middle-class families will lose some of the income tax cuts scheduled over the next
eight years as they are forced to pay a separate tax originally intended to make sure that the rich cannot live tax-free, a study released today
found.
By the end of the decade, when the tax cuts pushed into law
by the Bush administration in 2001 become fully effective,
85 percent of taxpayers with two or more children will be
forced off the regular income tax and onto a separate
system known as the alternative minimum tax.
The additional burden will fall largely on families with
incomes of $75,000 to $500,000. Just three years ago
fewer than one million taxpayers, most
at the upper reaches of the income spectrum,
were subject to the complex separate tax.
But if nothing is changed, by 2010 about 36 million
taxpayers will face it. Indeed, virtually all taxpayers
earning $100,000 to $500,000 will fall under its sway.
"What was a class tax is becoming a mass tax," said Len Burman
of the Urban Institute, one of the study's authors and
a tax expert under former
Presidents Ronald Reagan and Bill Clinton.
Under the alternative minimum tax system, many deductions
are denied, including those for children, the taxpayers
themselves and for state and
local taxes. At that point, taxes are
calculated at rates of 26 to 35 percent.
"We're talking about a really nasty marriage penalty,"
Mr. Burman said. "You are 25 times to 30 times more
likely to be on the alternative minimum
tax if you are married rather than single."
The study, drawn from computer models of tax behavior
similar to those used by Congress and the administration,
was made by the Tax Policy Center, a joint venture
of the Brookings Institution and the Urban Institute.
The authors of the study are economists who have served under both
Republican and Democratic administrations. While generally espousing
moderately liberal positions, they have done research and made calculations
that are generally considered nonpartisan and are widely respected.
It has been known since shortly after Mr. Bush's tax
cut bill was introduced last year that its rate cuts
would force many middle-class people off the
regular income tax and onto the alternative tax.
But the study provides the most in-depth look to date
at the impact on millions of taxpayers of the
interaction between the regular system and
the alternative tax.
Claire Buchan, a White House spokeswoman, said that "the administration is aware of this issue and will
continue to look at it and work with any
members of Congress who are interested."
The study, however, shows just how hard it will be to
repair the problem, demonstrating that almost any
solution will cost the Treasury hundreds of
billions of dollars or require raising taxes elsewhere
to compensate for the losses. No action is expected
anytime soon.
The new study also raises questions about whether
the government has, inadvertently, adopted an
antifamily tax policy despite years of talk in
Congress and on the campaign trail about
giving tax relief to middle-class families.
The study found that 97 percent of families with
two children and income of $75,000 to $100,000
would be forced off the regular income tax system
by 2010.
"This is a cop married to a nurse," said William
Gale of the Brookings Institution, one of the study's authors.
The alternative tax will raise only about $13 billion this year,
but its impact will soar to $141.4 billion in 2010,
the authors calculated. By 2008, they
said, it would cost more to repeal the alternative
tax than to repeal the regular tax, an indication
of the government's growing reliance on the tax.
For those making less than $50,000 - roughly three-fourths of all taxpayers - the alternative tax has only negligible effects.
For those making $50,000 to $75,000, the alternative
tax in 2010 will, on average, take away 18 cents of
each dollar of the scheduled Bush tax cuts.
For those making $75,000 to $100,000 it will take back
42 cents and for those making $100,000 to $500,000
it returns 71 cents of every dollar of rate
relief to the tax collector.
Taxpayers making more than $1 million, however, will
lose just 8 cents on each dollar of the Bush tax cuts
because most rich taxpayers would still
face higher rates under the normal system
than under the alternative tax.
More than half of the Bush tax cuts, when fully effective in
2010, will go to those making more than $1 million,
other analyses have shown.
The study yesterday showed that the burden of the
minimum tax will shift from the richest Americans to
the middle class, which the authors
defined as including people making up to $100,000.
Today people making more than $1 million pay 20 cents on each dollar that the alternative tax raises, but in 2010 that will fall to 5 cents. At the
same time taxpayers earning $50,000 to $100,000 will see their share of the alternative tax triple to 18 cents of every dollar raised.
This shift in who pays the alternative tax explains, the authors said, why those making $75,000 to $200,000 will pay a larger share of all income
taxes in 2010, while those making $1 million or more will pay less.
Those making $100,000 to $200,000, for example, will pay 21.8 percent of the combined revenue from the regular and the alternative income tax this year. That will rise to 27.1 percent in 2010.
For those making more than $1 million, however, their share of taxes will go down, from 21.6 percent this year to 18.5 percent in 2010.
When the current form of the alternative tax was adopted, as part of the 1986 tax reform act, it raised only about $1 billion from a relatively small
number of rich taxpayers who used aggressive techniques to avoid income taxes, Mr. Burman said.
The authors said that the revenue from the alternative tax is rising so fast that to return it to its original intent would cost as much as $951 billion over the next decade. They said simply abolishing the tax would make the system less fair. But limiting it to the old target could be financed, they said, by freezing the 2001 Bush tax cuts, for both income and estates, at their current levels.
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