Taxes, Deficits

Pass on the Patch

By, 03/27/2007

Ah . . . Spring. That magical time when crocuses poke their timid heads out to greet longer days, tender shoots of green remake the world anew, everything smells fresh and clean, and you discover you owe the U.S. government another 8 grand because you got nailed by the @#$%-ing AMT.

Interestingly, it turns out tax receipts are up. Way up. Fancy that. Tax rates got cut in 2003, which according to fine Senatorial minds meant the government would run out of money. (Fine by us.) Meanwhile, George Bush insisted he'd actually cut the budget deficit in half by 2008. What a moron! How could he expect to not raise taxes, run a bunch of expensive illegal wars to steal oil, and cut the budget deficit at the same time?

Pretty easily—President Bush met his deficit-cutting goal two years early. Normally, politically driven rhetoric about "reducing deficits" pains us like an icy dagger in our tiny, black, capitalistic hearts, but we don't mind so much when it comes at the hands of increased income. Apparently, if people make (and report) more income, they pay more in taxes. Who'd a thunk?

Undaunted by explicit displays of increasing prosperity, plucky politicians have found a new common enemy—the Alternative Minimum Tax (AMT). Without any sense of irony over who's responsible for creating this monster, they demand something be done! Now!

A little history on the AMT. To snag all of 155 high-net-worth households who were largely avoiding paying any income tax, Congress, with prescient perspicacity, passed the Tax Reform Act of 1969—thus the AMT was born. How does it work? Basically, if your income is over a certain amount and you claim a certain number of deductions, you must calculate both the normal income tax and the AMT—and then pay the higher amount. As if deciphering the normal tax code weren't fun enough, if your income's high enough, you qualify for the super special second round! And get to pay more! Good times!

Naturally, the AMT didn't have the effect Congress intended. Ultra-wealthy folk can still employ accountants and trust attorneys to avoid it. Meanwhile, a cop and a kindergarten teacher in Topeka with 2 kids and a combined income of $90,000 may not feel rich, but they get taxed like they are! Yippee!

Why are so many getting nailed with a tax specifically intended to soak the rich? Because tax laws haven't kept pace with inflation. Congress passes a "patch" every year, but not nearly enough to spare our cop/teacher combo. To "pay" for a bigger AMT patch, some politicians are demanding the repeal of Bush's nefarious tax cuts. We are confused about this. Isn't that robbing Peter to punch Paul in the face? A tax is a tax is a tax—we don't feel better about paying the same (or higher) taxes just because the name of the tax is different.

All of this talk about "paying" for tax cuts and the "cost" of fixing AMT is based on tax receipt estimates generated each year by the Congressional Budgetary Office (CBO). No disrespect intended, but when has the CBO ever gotten projecting tax receipts right? They certainly didn't project the tax windfall since the tax cuts were implemented in 2003. They incorrectly projected an increase in receipts following President Clinton's tax hike in 1993 (tax receipts dropped), and they got it wrong again on the 1997 capital gains tax cut. Why is Congress basing tax policy on projections from a group with that kind of forecasting track record?

We're no tax experts—and we'd not shed a tear if the federal government found itself heinously underfunded—but it seems more money left in the hands of private citizens and private enterprises historically has led to greater prosperity. And higher tax receipts too! Why not forget the patch and axe the AMT altogether?

Meanwhile, if the CBO is looking for more gainful employment, it is well-qualified to make market forecasts for any Wall Street brokerage firm.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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