The Alternative Minimum Tax Relief Act of 2008 is a one-year extension of tax exemptions and credits offset by increased taxes on equity fund managers. The act prevents the extension of the Alternative Minimum Tax (AMT) to more than 25 million middle-class taxpayers. The AMT was enacted in 1969 to ensure that the richest Americans were not able to avoid paying taxes. However, because the AMT is not indexed for inflation, households with incomes as low as $45,000 for joint filers and $33,750 for single filers are subject to tax increases on their 2008 returns. For 2008, the bill increases the AMT exemption to $69,950 for joint filers and $46,200 for individuals. The legislation also extends tax credits that offset both the AMT and the regular income tax, such as the child tax credit.
The Alternative Minimum Tax Relief Act offsets the costs of the AMT “patch” (so-called because it is only a one-year extension instead of a permanent change to the tax code) and the tax credit extensions by increasing the tax on carried interest, the fee paid to hedge fund and private equity managers for supervising investments. Under this legislation, carried interest would be taxed as earned income (a 35% rate for high-income fund managers) rather than capital gains, which are currently taxed at a rate of just 15%. Further revenue-raising measures include reducing the tax deduction granted to major oil companies and elimination of tax loopholes that allow foreign corporations to avoid paying taxes.
The Middle-Class Position:
The Middle Class Supports. The Alternative Minimum Tax Relief Act ensures that middle-class Americans are not overwhelmed by a tax that they were never intended to pay. An increase in tax payments for more than 25 million American homes – exposing fully 46% of households with incomes between $75,000 and $100,000 to the AMT – would be disastrous for families already reeling from home foreclosures, high gas prices, and nearly stagnant wages. The bill’s revenue-raising tax hikes target the appropriate group: extraordinarily wealthy hedge fund and private equity managers and corporations that have exploited loopholes in the tax code to avoid paying their fair share of taxes.
From the Experts:
“Private investment companies, organized as hedge funds or private equity firms, have recently grown into major economic forces in the U.S. economy… In addition to being unregulated, these financial institutions also reap substantial benefits from special tax provisions…The professional fund managers of these hedge funds and private equity firms are allowed to treat a substantial portion of their compensation as capital gains, meaning they are most likely taxed at 15% rather than the 35% rate that applies to ordinary income such as wages and salary…These super rich fund managers do not need and certainly do not deserve special tax breaks.” – Randall Dodd, Economic Policy Institute (July 24, 2007)
“In a tax code with no shortage of ironies, the alternative minimum tax (AMT) stands out. Created by Congress in 1969, it was aimed at millionaires, but relatively few millionaires pay it. It is billed as a low-rate levy, but most of its victims face higher taxes because of it. It undermines two widely lauded reforms of the income tax—restoring both bracket creep and the marriage penalty. At first glance, the AMT may seem simple and fair. But for reasons nobody imagined when it was created, the AMT bull's-eye hangs not on folks with Cayman Islands bank accounts, but on upper-middle-income families with lots of kids who happen to live in high-tax states. And it doesn’t just raise their taxes. It plagues them with mind-numbing complexity.” – Leonard E. Burman, Tax Policy Institute (October 29, 2007)
Beyond this Bill:
The Alternative Minimum Tax Relief Act suffers from an important flaw: it is temporary. Although complete abolition of the AMT has been proposed as a means to prevent the tax from swallowing the middle class, this proposal is a red herring that would permit the wealthiest Americans once again to avoid paying taxes. Indeed, according to the nonpartisan Tax Policy Center, repeal of the AMT would be more expensive than repeal of the regular income tax code. If repealed, 74.5% of the top fifth of income earners would see their taxes decrease, while only 0.1% of the lower two fifths of income earners’ taxes would be reduced. The appropriate solution is a permanent AMT fix that shields the middle-class and is indexed to inflation.
Number of taxpayers subject to the alternative minimum tax in 1970: 20,000
Number of taxpayers projected to be subject to the alternative minimum tax in 2010, absent changes in current law: 33 million
Number of taxpayers subject to the alternative minimum tax in 2007, after Congress passed a temporary alternative minimum tax patch: 4.1 million
Amount of lost revenue by 2018 that would result from repealing the alternative minimum tax, assuming the 2001-2006 tax cuts expire: $960 billion
Percentage of the benefits of repeal that would go to households with income above $100,000 in 2009: 90
Average compensation paid to the 25 individual hedge-fund managers with the highest earnings in 2006: $570,000,000
Approximate loss of revenue to the U.S. Treasury in 2006 alone from taxing the carried interest of these 25 fund managers as capital gains: $1,995,000,000
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