The IRS Gets One Right

Joseph W. Barr served the shortest term of any U.S. Treasury secretary. But thanks to the Alternative Minimum Tax, which he inspired, Barr may cast a long shadow over the finances of middle-class America.

This is a cautionary tale about how tax-the-rich rhetoric can rebound on the middle class. The story also shows that even the Internal Revenue Service can get one right.

President Johnson appointed Barr on Dec. 21, 1968. On Jan. 17, 1969, three days before President Nixon’s inaugural, Barr testified before Congress’s Joint Economic Committee.

His testimony, immortalized on microfilm at the Library of Congress, was unabashedly political.

“Mr. Chairman,” said Barr, “may I warn you that if this sounds a bit more like a stump speech than a statement by the secretary of the Treasury, that is precisely what it is intended to be.”

For what did Barr stump? Tax hikes on the rich.

“I will hazard a guess that there is going to be a taxpayer revolt over the income taxes in this country unless we move in this area,” he said. “Now, the revolt is not going to come from the poor. They do not pay very much in taxes. The revolt is going to come from the middle class.”

Why? “(W)hen these people see, as I see,” said Barr, “that in the year 1967, there were 155 tax returns in this country with incomes of over $200,000 a year and 21 returns with incomes of over a million dollars for the year on which the ‘taxpayers’ paid the U.S. government not 1 cent of income taxes, I think those people are going to say it is time to do something about it, and I concur.”

Inspired by this testimony, as the Urban-Brookings Tax Policy Center noted in a 2002 study, Congress that year enacted a “minimum” tax of 10 percent, a complex device theoretically designed to capture revenue from the 155 “rich” people who would otherwise exploit loopholes to escape income taxes.

Swatting at a gnat with a baseball bat, they swung and missed.

A 2001 study of the AMT by the Joint Economic Committee said that in 1967 there were 71.7 million U.S. taxpayers. The 155 “rich” who owed no income taxes that year equaled about 0.00022 percent of all taxpayers.

The real purpose of the new tax was not to capture revenue from the wealthy class, but votes for the governing class. “Although the minimum tax was small potatoes in terms of the revenue it yielded,” said the Joint Economic Committee, “it was a hot potato politically; in 1969, more people had written to Congress to complain about the 155 people who paid no income tax than had written about the Vietnam War.”

In any event, the tax did not achieve its stated purpose: In 1976, Treasury reported that 244 taxpayers who earned over $200,000 in 1974 had owed no income tax.

This sparked the first of multiple revisions (i.e., compounded complexities) in what became known as the Alternative Minimum Tax. In 1999, Congress voted to phase out the tax, but Clinton vetoed the bill. The tax survived.

Now it’s swinging toward a target it can actually hit: the middle class.

In her latest annual report to Congress, IRS National Taxpayer Advocate Nina Olson called the AMT “a time bomb on a short fuse.” She ranked it the No. 1 problem facing taxpayers.

“In 2005, it is projected that 65 percent of married couples with an adjusted gross income (AGI) between $75,000 and $100,000 with two or more children will be affected by the AMT — up from one percent in 2003,” wrote Olson, relying on analysis by the Urban-Brookings Tax Policy Center. “. . . In 2010, the AMT is projected to affect nearly 32 million taxpayers. The majority will have incomes under $100,000, and more than 36 percent of taxpayers with incomes between $50,000 and $75,000 will owe AMT.”

Why will this tax on the “rich” hit the middle class? First, unlike the regular income tax, which President Reagan forced Congress to index for inflation, the AMT was never indexed. Secondly, the AMT disallows deductions that go to the core of middle-class life — including those for dependent children and for state and local taxes.

Finally, Congress now factors into its budget projections — which foresee huge deficits — the revenue windfall from imposing the AMT on the middle class.

Joseph Barr was right about one thing. A middle-class tax revolt is coming. But it won’t be against the rich. It will be against the tax on the “rich” Barr inspired. And this time, an IRS official is leading the charge. National Taxpayers Advocate Olson recommends that Congress repeal the AMT. Politicians who reject this recommendation may find voters rejecting them.