The Anti-Family Tax

A good way to find Republican voters during the 2004 campaign was to look for traditional families. Nationwide, according to exit polls conducted for the major television networks, President Bush routed Sen. John Kerry 59% to 40% among married people with children.

Another good way was to look for people earning more than $50,000 per year. Bush beat Kerry 56% to 44% among those voters.

Now a massive tax increase is sneaking up on precisely the middle-class families that form the core constituency of the Republican Party, and even though the Republicans control both the White House and Congress, they may not be able to stop it.

A prodigal GOP may have already spent middle-class American families into a tax increase.

It will come in the form of the Alternative Minimum Tax.

Ever since the late 1960s, the tax code has included alternative minimum tax provisions theoretically designed to prevent the "rich" from using loopholes to avoid paying any federal income tax at all. As it now stands, people who might be subject to the Alternative Minimum Tax are required to calculate their federal tax bill twice. First, they calculate the amount they would owe under the ordinary tax. Then, they calculate the amount they would owe under the AMT. The law says they must pay the higher bill.

Three things are now pulling middle-class families into the maws of this tax. First, unlike the normal income tax, the AMT was never indexed for inflation. As wages have crept up with prices, workers making relatively less-affluent incomes have crept closer and closer to the threshold that will subject them to the AMT.

Secondly — and ironically — the cuts in the income-tax rates secured by President Bush are causing more middle-class families to have lower tax bills under the ordinary tax, thus exposing them to a potential AMT liability that would essentially seize the income that the Bush tax cuts would let them keep.

Thirdly, the AMT does not allow deductions for dependent children, state income taxes or property taxes. Under AMT, more children mean more federal taxes, and a more valuable house means more federal taxes.

Thus, the AMT is now homing in on suburban married couples with children who pay property taxes on houses large enough to accommodate old-fashioned families.

At a hearing of the Senate Finance Subcommittee on Taxation last May, government analysts from both the executive and legislative branches addressed this fact.

"[T]he AMT is not fair," said Robert J. Carroll, the deputy assistant Treasury secretary for tax analysis. "It disproportionately affects large families."

"The broad reach of the tax suggests that taxpayers in larger families (who have a greater number of personal exemptions) and taxpayers with larger deductions for state and local taxes will tend to be more affected by the AMT than will other taxpayers," said Douglas Holtz-Eakin, then-director of the Congressional Budget Office.

In 2001, 2003 and 2004, Congress enacted temporary increases in the amount of income exempted from the AMT to prevent an explosion in the number of families that would have to pay it. The latest fix expired January 1. The explosion impends.

"Beginning in tax year 2006, after the temporary AMT provisions expire," Treasury’s Carroll testified, "the number of taxpayers projected to be affected by the AMT rises sharply, from 3.8 million in 2005 to 20.5 million in 2006."

The additional 16.7 million people that would be subjected to the AMT this year includes some couples with two or more children and incomes as low as $67,890. But families making low six figure incomes will be especially rocked by the tax. "In tax year 2005," Carroll testified, "about 13% of taxpayers with incomes between $100,000 and $200,000 will be subject to the AMT. But, when taxpayers file their returns in the spring of 2007 for tax year 2006, over 75% of taxpayers in this income group will be subject to AMT."

By 2010, National Taxpayers Advocate Nina Olson testified, "94% of married couples with adjusted gross income between $75,000 and $100,000 and two or more children will owe AMT."

In December, the House approved a new one-year "patch" for the AMT, calculated to "cost" $31 billion in lost federal revenue. The Senate is also considering a new one-year patch. Why won’t an all-Republican government push to simply abolish the AMT? Because it has already made plans to spend every penny of revenue the AMT will bring in to the federal coffers from its expanded taxation of middle-class families. Abolishing the AMT, according the Congressional Budget Office, would reduce federal revenue by $611 billion between 2006 and 2015, adding that much to $2.26 trillion in deficit spending already in the pipeline for that period.