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Future Tax Shock
One of President Bush’s be-very-afraid lines this campaign season is that Democrats, if elected, will raise taxes. What he doesn’t say is that if you are one of tens of millions of Americans who make between $75,000 and $500,000 a year, your taxes are already scheduled to rise starting next year — because of laws that Mr. Bush championed and other actions he failed to take.
The higher taxes stem from the alternative minimum tax, a levy that is supposed to snare multimillionaires who would otherwise get away with using excessive tax shelters to wipe out their tax bills. But these days, the alternative tax is snaring many upper-middle-income filers.
Mr. Bush set the trap in 2001 — and in 2003, 2004 and 2006. In each of those years, he flogged for new tax cuts without requiring corresponding long-term changes in the existing rules for the alternative tax. It was well known that failure to update the alternative tax would create perverse interactions with the new tax cuts, causing filers’ tax bills to drop because of the cuts, only to shoot back up again from the alternative levy.
Mr. Bush said he would vanquish the problem through tax reform. Didn’t happen. Congress never wrestled with lasting solutions. The truth is, the president and lawmakers are paralyzed. To fix the alternative tax while keeping the Bush tax cuts on the books would result in the loss of some $800 billion in revenue over 10 years, blowing a hole in the federal budget and exposing how utterly unaffordable the tax cuts of the last five years really are.
The taxpayers wrongly afflicted by the alternative tax are not tax dodgers. For the most part, they are couples with children who have broken into the ranks of six-figure earners, and who live in high-tax states like New York and California. They are being penalized, in effect, for claiming everyday deductions — like write-offs for dependents and property taxes — which, under the alternative tax rules, are viewed as excessive shelters.
Meanwhile, multimillionaires are not being snared at nearly the same rate as other filers. In part, that’s because much of the income of the superrich comes from investments. The tax breaks for investments — the grail of the administration’s tax-cutting crusade — are not counted as shelters under the alternative tax the way, say, children are.
For the past few years, Congress has papered over the mess by passing temporary relief measures to shield most — though not all — upper-middle-income taxpayers from having to pay the alternative tax. The latest stopgap expires at the end of this year, leaving taxpayers exposed at ever lower income levels. Congress could pass another temporary stay, and it will probably do so.
But stopgaps do little to protect the families already being unfairly clobbered by the alternative tax. And they make the nation’s underlying budget problems worse. Like the Bush tax cuts themselves, they result in less tax revenue than is needed, requiring the government to borrow heavily. The mounting debt of the Bush years — all of which must be paid back with interest — makes tax increases or budget cuts, or both, inevitable.
The president wants to push off the day of reckoning until he leaves the White House, while whipping up voter fear of future tax increases. But the reality is that he and his supporters have laid the groundwork for higher taxes and hamstrung government, no matter who is in office in the months and years to come.