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FACT SHEETS TALK OF AMT, PROGRESSIVITY

March 03, 2005

The Treasury Department issued three "Fact Sheets" on taxes yesterday. Covering them in decreasing order of political content:

How Have the President’s Tax Cuts Encouraged Investment?

This sheet focuses on the "marginal effective tax rate on new investment," or "METR." The paper says boasts that the now-expired bonus depreciation provisions "lowered by one-half or more the METR on qualifying investment." Perhaps this is a lead-in to the tax reform debate, where we are likely to see arguments for much faster write-offs of capital equipment.

Who Pays the Most Individual Income Taxes?

This fact sheet wades into the progressivity debate. It shows that the share of income taxes paid by the top 1% and 5% of taxpayers has decined since 2000, but is higher than in 1995. The top 1% of taxpayers (by AGI) pays 33.7% of taxes, while the bottom 50% pays 3.5% of the income tax.

David Cay Johnston would hasten to point out that this only accounts for income taxes, and that the top 1% only pays 25% of all federal taxes. He would also assert that progressivity breaks down at the very top of the top 1%.

Both the Treasury and Mr. Johnston are right. What isn't clear is whether progressivity itself should always drive tax policy. This can be an uncomfortable debate for both sides. Even if it were demonstrated that lower effective rates for the top 1/10th of 1% of taxpayers made everyone wealthier, any forthright defense of this would lead to attacks on "trickle-down economics." On the other hand, if the connection between lower rates at the very top of the scale and an improved economy were demonstrated, those advocating more progressivity would implicitly be willing to make everyone a little poorer to make sure those at the top are paying their "fair share." At some point, progressivity gets in the way of other tax policy goals.

Historical progressivity chart from Treasury Dept. fact sheet

The Toll of Two Taxes: The Regular Income Tax and the AMT

This last paper is the least political. It simply states the grim math of the alternative minimum tax:

Left unchanged, the AMT will affect increasing numbers of taxpayers. As can be seen in the graph [below], assuming the 2001 and 2003 tax cuts are made permanent, the number of taxpayers with increased taxes due to the AMT will increase from 3.8 million in 2005 to 20.5 million in 2006 and to 51.3 million in 2015.

Chart showing that it will be cheaper to get rid of regular
income tax than AMT by 2013

This math is why it is likely that the ultimate "fix" for AMT from the tax reform process is likely to leave us with an income tax that looks something like the AMT - a system with fewer deductions (including a repeal of the deduction for state and local taxes) - and a lower top rate.

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