A Tax Primer
AMT — The alternative minimum tax. Created in the 1970s to close loopholes exploited by the wealthy to avoid paying income taxes, particularly after disclosures that Richard Nixon's 1974 tax bill was $792 because he had taken a $576,000 deduction for donating his presidential papers to the National Archives. The AMT is based on a separate calculation that prohibits some deductions, exemptions, and credits allowed in regular income tax calculation. A taxpayer pays the AMT amount if it is higher than his regular income tax bill. Because the AMT wasn't indexed for inflation, because local taxes have increased, and because tax credits for children and education have grown, millions of middle-income taxpayers are now forced to do the parallel AMT calculations — and are finding their regular tax bill is lower than the AMT amount. A taxpayer making $90,000 with three children with a typical set of deductions will be subject to the AMT in 2005, for example. The number of taxpayers paying the AMT will grow from 2 million to 40 million by the end of the decade, Congress's Joint Taxation Committee calculates. For most of the taxpayers in the Northeast, any benefits from the 2001 Bush-initiated tax cuts are neutralized because high state and local taxes push them into the AMT zone, according to the Citizens for Tax Justice, a union-funded research group. But fixing the problem will cost more than $600 billion over a ten-year period.
Class warfare — The first cry of tax opponents. Because of the progressive nature of the tax code, the wealthy pay a larger percentage of their income in taxes. Taxpayers in the wealthiest 20-percent bracket (with incomes over $72,000) pay 68 percent of the total tax bill. The top one percent (incomes over $373,000) pay 25 percent of the bill. Approximately 32 million pay no federal income taxes, including 9 million working taxpayers who receive an earned income credit. But virtually all of the 32 million who don't pay income taxes do pay a 7.3 percent Social Security and Medicare payroll tax. That tilt makes class warfare charges easy and almost automatic. For years, Democrats have criticized Republican tax-cut plans as disproportionately benefiting the rich. For years, Republicans criticized the Democratic tax proposals as disproportionately targeting wealthier taxpayers — "the people who pay the most taxes."
Consumption tax — One of two major proposals by tax reformers who would scrap the current system for a tax on spending, as opposed to income. Sometimes called a value added tax, it is, in effect, a federal sales tax. Imagine a 20 percent federal sales tax on everything you buy. Also, imagine the shopkeeper as Uncle Sam's tax collector.
Corporate welfare — Special-interest tax benefits for businesses. In the tax code's 9,500 pages, there are plenty of opportunities for special interests. One example: a tax credit for businesses that use ethanol, a corn derivative, benefits the major processor of ethanol, Archer Daniels Midland. Pharmaceutical companies routinely get research tax credits for developing new drugs. After Congress and the Reagan administration simplified the tax code in 1986, Congress passed a "transition rule." Technically, it set the terms for implementing the law. Politically, it included the special-interest provisions lawmakers had demanded to vote for the bill. It was packed with $10 billion in tax breaks, including provisions on valuing professional athletes that benefited Billy Sullivan, a lifelong friend of House Speaker Thomas P. (Tip) O'Neill and owner of the Boston Patriots. Firms like Tyco and Accenture have found shelter by locating "headquarters" offshore. Others get a break for purchasing cars for executives. Treasury Secretary John Snow's old company, CSX, paid no federal taxes for two and possibly three of the last four years by deducting interest costs on huge loans needed to purchase Conrail. Company profits in that same period were nearly $1 billion.
"Death Tax" — A 55 percent tax on estates of more than $1 million. That exclusion grows to $3.5 million in 2009, and the tax is eliminated in 2010. It affects fewer than half of one percent of taxpayers, but has moved to the top of the antitax hate list and its repeal was a central part of the 2001 tax plan pushed by President George W. Bush. But by a quirk in Senate rules that sets a ten-year limit on tax legislation, the estate tax is fully repealed for one year, 2010, then resumes in 2011. As Senator Paul Sarbanes (D-Md.) has noted, that has the potential for raising "interesting family dynamics" as 2010 comes to a close.
Flat tax — One of two major proposals by tax reformers who would replace the current system with a single-rate income tax, a flat, possibly a 19-percent tax on all income. It would simplify returns, which now take an average of 38 hours to complete. It would also end the American tradition that the rich should be taxed at higher rates than the poor.
F.S.C. — The foreign sales corporation. Multinational companies have been able to reduce taxes on foreign sales by routing profits through subsidiaries based in low-tax countries. This device has been used for years by major exporters like Boeing, which saves an estimated $100 million in annual taxes, and Eastman Kodak, which saves around $40 million. But Europe challenged the practice, arguing before the World Trade Organization that the practice was a subsidy that was improper in an era of free trade. While U.S. companies say the break helps them compete with foreign firms, the WTO ruled against the United States and announced a $4 billion fine. The dispute involves tax breaks of nearly $100 billion and has defied the efforts of two administrations and three Congresses to find a solution.
Gucci Gulch — The hallways of the Longworth House Office Building and the Dirksen Senate Office Building whenever the House Ways and Means Committee or the Senate Finance Committee are considering tax bills. Clusters of finely tailored lawyers, frequently wearing Gucci loafers or carrying Gucci handbags, are the signal that the committees are in session.
Payroll Tax — The 6.2 percent tax paid on the first $84,900 (2002) income that finances Social Security, which is matched by employers. An additional 1.9 percent tax on an individual's total wages helps pay for Medicare.
Starve the Beast — The presumed rationale for the gigantic 1981 Reagan tax cut. If federal revenues were cut, the beast of the federal government would have to be reduced in size.
Tax Expenditures — Your loophole is my fair share. Here are the six largest tax breaks and what they cost in taxes not paid: Employer contributions to company health plans ($120.2 billion); mortgage deductions ($68.4 billion); capital gains, except timber, oil, agriculture and coal ($53.9 billion); employer and employee contributions to 401-k retirement plans ($55.3 billion); and employer and employee contributions to pension plans ($67.9 billion); and deductions for state and local taxes ($50.9 billion).
Enjoy this piece? Consider a CJR trial subscription.
