DOES GEORGE BUSH HAVE A SECRET PLAN TO IMPOSE A flat tax? I can't read his mind but one thing is clear: Unless the president's tax program adopted last year is amended, by the end of this decade most of the personal income tax revenue will come not from the regular, graduated-rate system but from the essentially flat rate, individual "alternative minimum tax."
This isn't supposed to be how the alternative tax--first adopted in 1969 to prevent wealthy people from sheltering all their income from tax--was supposed to work. As recently as 1999, only a million taxpayers, almost all of them very well off, actually paid the alternative tax, which added just $6.5 billion to federal revenues. But absent legislative change, by the time the Bush tax cuts are fully in place in 2010, 36 million families will have to fill out the complicated alternative tax forms, and cough up an extra $140 billion on top of their regular taxes.
By 2010, some 27 million families, just under a fifth of all taxpayers, will earn between $100,000 and $500,000 a year (averaging $167,000). Astonishingly, a staggering 24 million of these families will have to pay the alternative tax. Even at less elevated income levels, the alternative tax will become a big deal, affecting more than 10 million of the 29 million families making between $60,000 and $1000,000. Altogether, taxpayers subject to the alternative tax will pay almost two-thirds of all income taxes by 2010.
As its name implies, the alternative tax makes potentially affected taxpayers figure their taxes twice. First, they do the calculations using the regular deductions and rates. Then they recompute their taxable income without certain write-offs, most notably for state and local taxes. After subtracting a flat exemption, what's left is multiplied by 26 percent (28 percent above $175,000) to get the alternative tax. Whichever is bigger, the regular or alternative tax, is what they have to pay.
Why does the alternative tax threaten to engulf the personal income tax? Part of the reason is that exemptions--$45,000 for couples and $33,750 for singles--haven't been adjusted since 1993. But more important is the fact that Bush didn't accompany his cuts in the regular income tax rates with corresponding reductions in the alternative tax rates--creating a ticking alternative tax time bomb.
When Bush kicked off his presidential campaign at the end of 1999 by trumpeting his tax cut plan, I put out an analysis of its likely cost and (regressive) distribution. Relying on what turned out to be disingenuous tax cut examples that Bush's campaign circulated, it seemed clear to me that the plan envisioned lowering the alternative rates along with the regular rates. …