The alternative minimum tax and one man’s 74 percent tax rate
In his Saturday column in the New York Times, Pulitzer-prize winning reporter James B. Stewart tallied up his tax rate and found it to be a shocking 74 percent of taxable income. Is he possibly the most taxed man in America, he wonders?
Tax rates have been much discussed of late, with Mitt Romney’s tax returns disclosing his 13.9 percent tax rate, and the appearance of Debbie Bosanek, Warren Buffett’s secretary, at the State of the Union address last week to boost President Obama’s push for more tax equity. Bosanek is reported to pay a 35.8 percent tax rate, while her famous boss says his rate is 17.4 percent of his taxable income.
How could Stewart’s rate be so stratospheric? After some research, he determined that his personal situation is “a near-perfect storm of punitive tax policies.” He lives in one of the highest tax districts in the country (New York City), earns his income (rather than getting it from capital gains or carried interest, a la Romney), doesn’t have a significant mortgage deduction and pays an unincorporated business tax on some of his income, like book royalties.
Even his very generous donation of 25 percent of his income to charity did only limited good (for his taxes, at least).
The high local and state income taxes he pays in New York help to make Stewart’s deductions (which include those taxes) high relative to his income and that activates the alternative minimum tax (AMT), a painful burden to those who bear it. Also, a burden that more of us will be bearing if changes aren’t made this year in Washington.
Originally designed as a way to make sure the wealthy pay their fair share (sound familiar?), over time the AMT has slipped down to cover many who more rightly would be considered middle class.
The A.M.T. added just $233,000, or 8 percent, to Mr. Romney’s federal tax bill. It added 40 percent to mine. According to the Tax Policy Center at the Brookings Institution, 51.7 percent of taxpayers reporting incomes of $200,000 to $500,000 paid the alternative minimum tax in 2012, while just 41.6 percent of taxpayers reporting more than $1 million did.
Like so much of tax policy, the AMT is dealt with in fits and starts. In 2010 a “patch” was passed to make sure the tax didn’t hit too many more Americans, but now it has expired. Unless Congress takes action by the end of this year, its reach will expand quickly.
According to this excellent primer on the AMT from the Tax Policy Center, if the AMT tax cuts are not extended this year, the percentage of taxpayers owing the tax will jump from 5 percent to more than 20 percent in 2013, and 94 percent of those with incomes between $200,000 and $500,000 will owe the tax in 2012.
Those hardest hit by the tax are families with a number of children, and those living, like Stewart, in places with high local and state taxes.
According to the Tax Policy Center:
The top five states in terms of percentage of returns on the AMT are New Jersey, New York, Connecticut, the District of Columbia, and California with rates ranging from 8.7 percent to 6.5 percent in 2008. In contrast, less than 2 percent of taxpayers in Alaska, Nevada, South Dakota, Tennessee, West Virginia or Wyoming paid the alternative levy.
Some politicians and others have called for a permanent fix to the AMT, but the trouble is that the tax is expected to bring in a lot of tax dollars over the next decade, and ending it permanently would require lawmakers to find a substitute revenue stream.
The Tax Policy Center calculates that extending the patch would shave $85 billion in revenue in calendar year 2012 and reduce the number of taxpayers affected by 85 percent from over 31 million to 4.6 million.
Ending it permanently, however, would cost a stunning $1.1 trillion through 2022.
“It’s either a win win, or a lose lose,” said Jim Nunns, senior fellow at the Center. Nunns predicts that given the path most tax issues have followed in recent months, the AMT is unlikely to get much real attention until later this year.
But Stewart’s piece clearly hit a nerve in other parts of the country. So far there are more than 400 comments from readers.
What do you think? Add to the debate below.