December 13, 2007

Clinton And the AMT: WSJ Half-Truths Get Even Less Truthier

The Wall Street Journal's editorial board this week, in its discussion of how to reform the individual Alternative Minimum Tax (AMT), asks itself the bold question: if we start out by telling a half-truth and make it even more misleading, what do we end up?

The answer: an outright lie.

We've noted before that the WSJ guys enjoy blurring the truth about the AMT's history. But they now clearly think "blurring" is not enough.
RE the apparently all-important question of who should be blamed for the impending AMT mess, here's what they say in a December 10 editorial:
The AMT was never supposed to hit the middle class, and it only does so now because the Democrats who designed it failed to index it for inflation and raised AMT rates under Bill Clinton in 1993.
This is laughably wrong for two reasons, in descending order of importance:
1) The Clinton AMT changes of 1993 actually reduced the growth of AMT liability.
2) Failure to index the AMT for inflation is a bipartisan failure, equally attributable to the folks who run Congress now (Dems) and the folks who ran it for most of the last two decades (Republicans). To pin this excusively (or even primarily) on Democrats is both pointless and wrong.

Thing #2 is pretty clear, and is too obviously politically motivated to spend much time with. Thing #1 is worth explaining a bit. Here goes:

The idea of the AMT is simple: we've got a regular income tax that has a top tax rate of 35 percent (now) and a ton of loopholes. Now, if Congress could repeal all the loopholes, the rates could be lower. But they have never been able to agree on eliminating the loopholes, so instead they created a backstop tax, the AMT, that doesn't have as many loopholes and has a much lower rate. So upper-income Americans either pay higher tax rates applied to a narrower base, or lower tax rates applied to a broader base, whichever is higher.

The thing to take away from this is that the regular tax and the AMT act in concert. If you want to keep the two working together, changes in the regular income tax need to be accompanied by changes in the AMT.

Now the big tax bill in 1993 did three things that affected the AMT.
1) it increased the top regular income tax rates.
2) it increased the AMT tax rates, to keep pace with the regular rates.
3) it increased the AMT exemptions, to help keep middle-income families out of the tax.

Of course, the WSJ conveniently omits things #1 and #3 in this list, and just says Clinton hiked the AMT rate. Which makes it sound like Clinton hiked the AMT.

But, as the Tax Policy Center has demonstrated, when you look (sensibly) at the net impact of all the 1993 tax changes in the AMT, what you see is that the Clinton changes actually reduced the growth of the AMT.

The TPC report also notes that, aside from inflation, the biggest factor contributing to the AMT explosion is the Bush tax cuts.

And this makes all the sense in the world. If the regular tax and the AMT are working in concert, and you cut the regular tax rates without cutting the AMT rates, OF COURSE you're gonna push more people into the AMT. That's just the way it works. But the Bush people did it, and they did it knowingly.

So let's recap: there's two kinds of policy changes that people are talking about that affect the AMT. One has to do with inaction (the lack of indexing) and the other has to do with actions (the Clinton 1993 tax changes and the 2001 Bush tax cuts).

The WSJ correctly notes that inaction is part of the problem, so kudos to them for that. All they're doing wrong on this front is saying that it's all the Democrats' fault.

But on the "action" side, the WSJ is completely ignoring one thing that obviously, glaringly, undeniably pushes more people into the AMT (that is, the 2001 Bush tax cuts), and is dishonestly mischaracterizing the other thing (the 1993 Clinton tax changes) in a (wrong) effort to say that it's all the Democrats' fault.

Politically motivated newspaper people must, I magine, face a constant struggle between telling their readers things that are true and telling them things that will help score political points. There's often a tension between these goals. The WSJ editorial board's party line on the "Clinton AMT" may ultimately help achieve their "scoring political points" goal, if only by making people more confused about taxes. And I'm sure they'll be happy about that.

But it also subtracts from the sum total of human knowledge. Not something you can often say about a newspaper article-- that you are dumber or less-well-informed after reading it than you were before you read it. But that's exactly what the WSJ has achieved with their latest Clinton-AMT screed.


Post a Comment

<< Home