Correction to This Article
Ruth Marcus's Feb. 7 column misstated a Congressional Budget Office revenue forecast. The CBO projects that the administration's forecast of tax revenue is $155 billion too high for 2012, not over five years as stated in earlier versions.

Bush's Stealth Tax Increase

AMT and Bush
By Ruth Marcus
Wednesday, February 7, 2007

Even President Bush acknowledges that he can't balance the budget without raising taxes.

The president would never put it that way, of course. In fact, his message is exactly the opposite. But the coming tax increase is the unavoidable, unstated subtext of his supposedly balanced-by-2012 budget.

The reason is the governmental cash cow known as the alternative minimum tax. Assume for the moment that the administration could somehow convince the newly Democratic Congress to accede to its pincer-tight domestic spending levels and to significant reductions in entitlement spending.

Assume also that the administration is right about how much tax revenue the government will take in -- though the Congressional Budget Office says it's too rosy by $155 billion in 2012.

Even then, the only way the administration achieves its balance is by assuming that it will continue to rake in billions of dollars in revenue from the alternative minimum tax. More than billions, actually: CBO estimates that if left unchanged, the AMT would bring in an extra $1 trillion through 2017.

So the president achieves balance only with a stealth tax increase in the form of the AMT. If he means, as he says and nearly everyone agrees, to fix the AMT, that revenue has to come from somewhere else.

The AMT, as you may have had the misfortune of discovering, is hitting growing numbers of taxpayers who are further down the income scale. That's because (1) the level at which it takes effect isn't adjusted for inflation, so more taxpayers find themselves covered over time and (2) the Bush tax cuts lowered regular income tax rates, sweeping additional taxpayers into the alternative system.

Figures compiled by the Urban Institute-Brookings Institution Tax Policy Center demonstrate the AMT's dramatic effect. If nothing is done to fix the AMT and the Bush tax cuts are extended as he wants, 89 percent of married families with two or more children and incomes between $75,000 and $100,000 will be hit by the AMT by 2010 -- compared with less than 1 percent in 2006. By 2017, almost half of all taxpayers -- 53 million -- will owe the AMT. The tax will hit two-thirds of those making between $75,000 and $100,000 and 90 percent of those making $100,000 or more.

Looked at another way, what the Bush tax cuts give to taxpayers, the AMT grabs back. By 2012, if it isn't changed, the AMT would take back almost one-third of the Bush tax cuts. As the accompanying chart shows, it would take back more than half of the tax cut for people making between $100,000 and $200,000.

In fact, in an irony that only a tax geek could love, the AMT has been transformed from its original purpose, a means of assuring that the wealthiest pay at least some taxes, into a way of underwriting tax cuts for the wealthiest. Because the AMT hits fewer of those with the highest incomes, the rather comfortable end up subsidizing Bush's tax cuts for the super-rich.

Instead of dealing with the AMT, the administration has simply slapped on another one-year fix. It says it wants a permanent solution but in the context of revenue-neutral comprehensive tax reform. This is Washington-speak for "we have to find the money somewhere, but we're not ready to say how yet."

So where will the money come from? The Tax Gap Fairy isn't going to leave enough under the budget pillow; the administration's calculation of how much owed but uncollected tax revenue can be brought in comes to just $29 billion over the next decade. The working poor don't pay income taxes -- in fact, they get money back through the earned-income tax credit and the refundable child tax credit, and even this administration isn't proposing to do away with them.

That leaves the middle class, the better-off and corporations to divvy up the tab. In that context, does it really make sense to permanently repeal the estate tax? To leave in place lower tax rates for the richest Americans? To continue to tax capital gains and dividends at far lower rates than ordinary income? These are the choices that the Bush budget entails, even if it fails, deliberately, to spell them out.

© 2007 The Washington Post Company