April 26, 2007

Clinton and the AMT: Evolution of a Bald-Faced Lie

It's easier to confuse people about taxes than it is to educate them. And some people count on this to help them achieve their anti-tax goals. Exhibit A: the ongoing debate over how to fix the federal Alternative Minimum Tax (AMT). When people hear that the AMT threatens to hit 23 million people in 2007, the first question they ask is typically "how did this happen?"

The answer is pretty straightforward:
1) Every Congress since 1986 is at fault for not indexing the AMT exemptions for inflation.
2) The architects of the 2001 federal tax cuts are at fault for cutting the regular income tax rates but leaving the AMT rates unchanged.

But you wouldn't know it to listen to this guy:
Once again, you have shown your Democratic bias by noting that the AMT was created in 1969 instead of reporting that this AMT problem was created by the 1993 Clinton tax increases on so-called "millionaires." These changes included an increase in the AMT rate from a single rate of 24 percent to rates of 26 percent and 28 percent. This tax increase was passed without a single Republican vote in either the House or Senate and required the then-vice president, Al Gore, to cast a tie-breaking vote to get this tax increase through the Senate...According to Congress' Joint Committee on Taxation, which "scores" tax policy changes, if the 1993 Clinton increase in the AMT rates were reversed, the AMT would hit "only" 2.6 million taxpayers in 2007 instead of 23 million.
The Joint Committee on Taxation document the author (a guy named Steve Early) is referring to can be found here. And in fact, the JCT report does describe a scenario under which the number of AMT families in 2007 would be 2.7 million instead of the currently-scheduled 23 million. The only problem is, Early complete misunderstands what this scenario means.

The scenario in question is not, as Early implies, "here's how things would be in 2007 if the Clinton tax changes had never been enacted." Rather, the 2.7 million scenario is "here's how things would be in 2007 if the AMT exemptions had been increased every year since 1987 to keep pace with inflation." A big difference.

How could Early get this so wrong? Well, there are a couple of documents floating around on the Internet that are clearly designed to mislead people on this score. Start with this thing from the "Republican Policy Committee." The RPC report says:
But for the Democrat Congress’ 1993 increase and its failure to index for inflation, only 2.6 million tax filers would be subject to an AMT penalty in 2007 rather than the projected 25 million under current law.
This is very clever-- but very misleading. What the RPC does here is to take two separate policy choices (one a long-term choice by every Congress since 1987 to not index the AMT exemptions, the other the Clinton 1993 tax changes), lump them together, and blame the whole thing on Clinton. But these two changes have very different impacts:
  • The long-term, ongoing choice of Congress not to index the exemptions has had the inexorable impact of pulling more and more people into the AMT every year. It's a choice any Congress over the past 20 years could have reversed-- but none have.
  • The 1993 Clinton tax changes did three things that affect the AMT, and these things have impacts that work in opposite directions. First, the exemptions were increased (which, taken on its own, should reduce the number of AMT taxpayers). Second, the AMT rates were increased (which, taken on its own, should increase the number of AMT taxpayers). Third, the top regular income tax rates were increased (which, taken on its own, should reduce the number of AMT taxpayers.
So the Clinton changes include AMT changes that go both ways. You can see why it wouldn't be obvious to a casual observer what net impact the Clinton changes would have on the AMT.

Fortunately, we've got the Tax Policy Center to help us understand these things. This TPC publication looks at the factors shaping the current AMT time bomb, including the two things the RPC paper looks at (non-indexation and the Clinton changes) as well as the Bush tax cuts. And unlike the RPC paper, the TPC report actually does us the favor of separating out the impact of the Clinton changes from the impact of not indexing the exemptions.

The result? It turns out that "the OBRA93 changes to the AMT and to regular tax rates alone—ignoring the [Bush tax cuts]—would have reduced the number of AMT taxpayers in 2010 by about 2 million."

Maybe Early knows this and maybe he doesn't. But the RPC paper seems intentionally designed to confuse people into making this kind of mistake. (Granted, in order to be lulled into this mistake you probably have to be the kind of person who refers incessantly to the "Democrat Party" or who prattles endlessly about the fact that Al Gore cast the tie-breaking vote in the 1993 tax hikes.)

If the RPC paper seems misleading, the Wall Street Journal editorial on this topic from a while back is simply a lie:
[T]he politician most responsible for the AMT's relentless expansion in recent years is none other than William Jefferson Clinton...Going back to the pre-Clinton rates would leave only about 2.6 million tax filers subject to an AMT penalty next year instead of 23 million under current law.
If the RPC paper misleads people by describing the collective impact of two very different tax changes in one breath, the WSJ editorial simply lies by attributing the impact of both policy changes to the Clinton rate hikes. To make my criticism perfectly clear, if the WSJ editorial had been accurately written, the last sentence of this quote would have read: "Going back to the pre-Clinton rates and increasing the AMT exemptions to equal their inflation-adjusted 1987 levels would leave only about 2.6 million tax filers subject to an AMT penalty next year instead of 23 million under current law." And to really be accurate, the editorial would have pointed out that the real driver in these changes would be the inflation adjustment, not the Clinton tax changes.

The always-excellent "Taxing Matter" weblog disembowels the WSJ editorial effectively; read it here.

Hard to see how these guys can look in the mirror in the morning-- playing the "blame game" and lying to boot. This is exactly why people don't try to learn about taxes.


At 7:30 AM, Anonymous Anonymous said...

Matt, you called what Early did "clever."

I'm not really sure that is a particularly accurate way of describing an action which results in the deception of untold numbers of Americans.

One part of the definition of schizophrenia is a "distorted view of reality." I don't expect Early's comments to induce hallucinations, yet I still think inducing mental unfitness, the creation of a form of insanity in a person or people, should be considered a crime, and (since he is among those people) not particularly "clever" at all.

"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." --Mark Twain, Gilded Age prophet.

At 3:51 PM, Anonymous joanmcq said...

What galls me is that even if the sleight of hand and rhetoric that passes for tax debate is easily misunderstood by the average joe, the WSJ should have writers educated enough in tax law and history to not distort or outright lie to its readers.


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