Brad DeLong's Semi-Daily Journal (2004)

For all of our foreign readers, the sound you just heard in the distance was Prof. DeLong hurling his calculator with great force into the wall because he was assessed the Alternative Minimum Tax (AMT).

http://slate.msn.com/id/2098757/

Sorry to hear that.

And here I was wondering about why Prof. DeLong invested in Ameritrade (AMTD) ...

Might I suggest an apostrophe after the letter "t". At least you weren't gst'd and pst'd. What is the amt?

Pretty nifty the way Mr Bush has shifted the tax burden from the truly wealthy to the not quite wealthy.

After reading the slate story, it appears that I DEFINITELY won't need to worry about paying the AMT.

But look on the bright side, you know where all your money went...

Most of my coworkers (and myself, albeit just barely) got "hit" by AMT. I have to say I expected it. Some were exposed by state income & property taxes not being AMT deductible.

Brad, I'm surprised that you are surprised. The point has been made over and over again that only the "regular" income tax rates were cut, but AMT was not changed.

If I were to characterize AMT in one sentence, I would say its purpose is to limit the impact of (certain) deductions on your taxable income, which hits California homeowners in particular. The perfidious thing is that AMT has not been indexed to inflation for a long time (presumably because before the tax cut it did not affect many people).

I don't know what your household is making, but I safely presume it is 6+ digits (so to speak), and federal tax is one-size-fits-all. I did not do a comprehensive analysis, but I suspect the tax cut applies in principle to people with a high marginal tax rate and (relatively) few deductions (the $300K+ crowd you alluded to). Now you see how it is cross-financed.

I'd say that the Bush administration isn't so much shifting the tax burden from the really wealthy to the upper-middle class so much as he is shifting it from the current really wealthy to future taxpayers of, as of yet, undetermined wealth: perhaps the future's really wealthy, perhaps the future's upper middle class: all remains to be seen.

Confiscatory.

Bush' tactic of leaving the AMT in place has an obvious purpose. Forever ill serving of the public interest and corrupt, the US government is off the rails with no way to put it back on. Maybe going back to the articles of confederation wouldn't be so bad. *sigh*

Halliburton and Raytheon each thank you for your year 2003 contribution.

I think the nastiest thing about the AMT isn't necessarily the tax itself, but the bizarre and sadistic calculation you make to get there. I remember late on April 14th in 1999 when I was patting myself on the back for finally finishing the federal taxes... Well, all done except for the line where you needed to check for your possible exposure to the AMT.

Two hours later, I felt rather different about the tax system than I ever had before.

Whenever people throw the terms, "rich", "middle class", "upper middle class", they should really include some #'s to show what they are thinking. Really, the terms mean nothing unless you place some income #'s behind them so we have an idea of what one means.
I was just having this conversation with a dedicated democrat who considers himself "middle class", his own words, yet has an annual income of 200k plus and no children. Made me chuckle. Of course, since he wasn't "rich", he wanted a tax cut.

I think we need more classes than lower, middle and upper.

The middle class is probably at least three classes by itself. I remember having a discussion where I was using middle class from below while someone else was using it from above. We were talking about very different situations.

William Utley: "Middle class" is a quite fuzzy term. Here in the SF Bay Area, a household income of 200K is by no way out of range for what many people would call middle class. (And cost of living here is scaled to that in many respects as well.) In other locales, your mileage may vary.

I think the term "middle class" is much more informative used in its original Marxian sense, as defined by relationship to the means of production. Changing things just a little bit, this makes the Bill Gates of the world the nobility, the $300000/year group the middle class, and the rest of us the working class.

As CM notes, the actual amount of money needed to do this varies by locale.

My reason for liking this scheme is that being middle class means being able to buy your way out of the public sphere. You don't care about public schools because you send your children to private schools. You don't use public recreation areas; you belong to a club. You are even less dependent than most on public police; you live in a gated community and work for a company that provides its own security. If high-priced lanes are opened on expressways you'll use them.

In this sense the Bush tax cuts DO benefit the middle class.

I think the use of the term to mean "median income" or similar is a debasement of the term brought about by the American unwillingness to admit that there is a class structure in our society. It's not nice.

I cant feel sorry for you. I made less than the Standard deduction this year.

How's that for tax avoidance?

The GOP tax strategy has ALWAYS been to preach tax cuts for everyone. The legislation only cuts taxes for the really wealthy leaving everyone else overtaxed. This maintains broad support for tax cuts. The GOP has been doing this for years. If the GOP cut taxes for middle and lower class, there would be no broad support for tax cuts. The GOP wants taxes high on the lower classes so they will not demand more services from their governments. People are starting to catch on. There is now more support for reducing the deficit than cutting taxes.

I thought that the classes were indicative of occupation rather than income. A production worker on an oildrilling platform is working class but making more than a school marm who is middle class.

Regarding "who's rich": remember, "rich" should be defined by wealth, not income (of course, suitably normalized for life cycle effects).

I think there might be a nefarious plan to get us a flat tax - it's called let the AMT gradually replace the regular, complex tax.

The nastiest part of the AMT is that taxes of capital gains and dividends are taxed at their low Bush-tax-cut rates, but earned income is taxed at normal AMT rates.

Liberal, you're entirely correct. I place people in the rich/wealthy category if they do not have to work for a living. If you MUST HAVE A JOB to maintain your lifestyle then you are middle class or lower. Hence, my wife and I, subject to the AMT this year as well, can pull down a nice combined six-figure salary yet still be slaves to the wage.

Could it be that I'm falling prey to the tired argument that "high taxes are a disincentive to success"? Possibly... it's definitely true in the AMT's case. It should be indexed and fixed to bring sanity to the tax code. But tax reform is a Dem issue, isn't it?

PigInZen: The key phrase in your comment is "must have a job to maintain your lifestyle." This begs the question of what an individual "lifestyle" consists of. In fact, lifestyle seems to me synonymous in this instance with "wealth." So this is really a tautology.

Having to work to maintain the level of wealth which you feel is appropriate to yourself is not the same thing as having to work to stay alive - the condition of most humans throughout history and the vast majority of the world's population today.

aah, but don't we see... the AMT'd constituency is not one Bush has reason to give two figs about. The truly, upper eschelon rich have been AMT'd forever but are getting other tax cuts candy. They do not feel your pain. At present, the AMT doesn't reach down quite far enough to hit a good "anecdote family" (i.e. low income, lower-middle income).

It's an interesting dynamic and a burdening of the upper middle class to the benefit of the rich and the rhetorical benefit toward the lower classes.

wvmcl: "Having to work to maintain the level of wealth which you feel is appropriate to yourself is not the same thing as having to work to stay alive ..."

Most people have to work to stay alive. I also make a good salary, but if I stopped working, I would not last long. This is the "you _choose_ not to starve/to work" (as opposed to being forced) fallacy.

Once people do have to work, they try to get as much as possible out of it (don't you?). But it's increasingly becoming an all-or-nothing game.

If you've ever supported flat tax, you should support AMT without inflation indexing (at least for the next decade or so). AMT is a genius way to implement flat tax with less regressiveness of a simple flat tax. So please stop whining about AMT, that is the best hope we have now to move to a simpler tax system with fewer loopholes. If you think people in California and NY are hit disproportionately hard by AMT, then do something at the state level. Don't spoil AMT for everyone else, please!

After working on my 1040 right up until the April 15th dealine, I finally threw up my hands in horror while working on the AMT work sheet, filed for an extension, sent along a check with it, and called a CPA for help. The Economics profession needs to convene a conference to simplify and rationalize the U. S. Tax Code. It should be possible for an average person to complete the tax forms in a couple of hours. In its present form the code is an abomination.

bncthor

Bhako,
I disagree with you that lower and middle class taxpayers need to have their federal income taxes cut. As it is now, they hardly pay any federal income taxes on a percentage basis. The second (starting from the bottom) quintile, middle, and fourth quintile pay effective federal income tax rates of .3%, 3.8%, and 7.2%. When you include social insurance taxes the rates are 11.6%, 15.2% and 19.3%.
I wonder if we eventually move to a more European model of taxation. That is, low or no capital taxes and higher income taxes. Seems to be a more efficient and sensible way to run things.

I think the term "middle class" is much more informative used in its original Marxian sense, as defined by relationship to the means of production. Changing things just a little bit, this makes the Bill Gates of the world the nobility, the $300000/year group the middle class, and the rest of us the working class.

Really? I mean, in the Marxian sense, wouldn't the "nobility" be those whose maintenance is by virtue of birthright and attachment to the political system, the upper class -- the capitalists -- be those whose maintenance is principally through ownership of capital, even though they may do some paid labor as well, the middle class -- "bourgeosie", or "petty capitalists" -- being those who derive most income from labor but also have significant investment in and concern for capital (including capital held in retirement plans, but not the very indirect holdings in, say, fixed-benefit pension plans), and the true working class being those who derive their maintenance from labor and have little-to-no direct interest in capital, except perhaps in some personal 'capital' (tools, vehicle) that aren't value producing so much as enabling them to function in the labor market.

I suspect that Marxian class boundaries would have a fuzzy relationship to income, and I don't think that the entire area below $300,000 would be dominated by the "workers", or that the bulk of the "middle" class would be above $300,000.

Maybe I'm misremembering Marx's class conception, though.

Part of the purpose of Reagan's tax overhaul was to simplify the system. Later Reagan, Bush, and especially Clinton and BushII put all the complexity back. Most of Clinton's education schemes involved tax credits, which make the code more complex. I would love to see a simplified tax code - eliminate all the silly deductions for mortgage interest, education, health expenses, state taxes(why should someone get a credit for state income taxes, but not state sales taxes?), etc. and increase the standard exemption to 15 grand or so. Tax all income types at the same rates, whether it is wage, (inflation adjusted) capital gains, dividends, (inflation adjusted) interest, rather than having different standards for each. The most important part of the flat tax is not the flat rate structure, but rather the elimination of all the deductions and exceptions and confusions.

Of course, that dooms upper middle class home"owners" (if you have a $250k house, and you owe $150k to the bank, who, exactly, owns your home?) to massive tax increases. That's fair. For those of you who complain about Berkeley's home prices, and how $200k isn't that much money - uh, Durham, NC or Austin, TX have perfectly good universities and diverse industries, and much lower cost of living. We are a nation of immigrants - move to where you can live better. Living in the Bay area is an expensive luxury - it probably should be taxed as such(joke). Seriously, some people have BMWs, some have boats, some live in desirable places like Berkeley. It is a choice. Live with yours.

Speaking of class, I just posted a summary of CBO's distribution tables (1979--2001) for the federal tax burden:
http://www.truthandpolitics.org/fed-tax-burden-cbo.php

A pernicious side-effect of the AMT is the way it hinders enforcement of our employment discrimination laws. Say a hostess at a restuarant is fired because of her race. She sues; she recovers $25,000; she petitions the court for a reasonable attorney's fee, say $100,000, which is granted.

The attorney's fee is counted as income to her; the AMT will not permit a deduction for this attorney's fee; consequently, the amount she pays in taxes will probably be more than the amount she received from the lawsuit.

A rational person in her position would never have brought suit at all. Thus, the AMT discourages vigorous enforcement of the law.

While you do have my condolences for having to go through all the receipts, you don't for the tax.

The AMT is in a number of ways more fair than our current rat warren of tax loopholes, and it is a step closer to the "flat tax without deductions" that folks like Steve Forbes raves about.

These days, it's not a bizarrely complex thing, it's a button that you press on Turbo-tax.

The AMT first came to my attention when dotcommers who got incentive stock options were on the hook for lots of money.

With regular stock options, which are taxed and withheld as income, they would have been fine.

Instead, they chose a vehicle that allowed them to avoid social security taxes and to pay income taxes at the lower capital gains rate.

They and their employers chose a complex tax scheme to game the tax code, and they lost, boo hoo.

To be clear, my preferred solution would be a MUCH more progressive tax code (including tax credits to cover the first 2000-4000 of payroll taxes) with far fewer deductions, but I don't have a problem with this.

Actually, getting hit with the AMT is not really a good indicator of high income. The one year I got hit by it, I had just graduated from B-school. I had lots of deductions relative to the 4 1/2 months of income I had. Result - a nice, unexpected tax bill.

Anyone for confiscatory estate taxes on large estates, with very limited sheltering? I know I am.

>The AMT first came to my attention when dotcommers who got incentive stock options were on the hook for lots of money.
[...]
>they chose a vehicle that allowed them to avoid social security taxes and to pay income taxes at the lower capital gains rate.

SS taxes are capped, so most of these people paid the max- they avoided nothing.

The people in real trouble excercised their options and held the stock- intending to hold long enough to qualify for long term capital gains treatment, a perfectly legal and ethical financial planning tactic.

>They and their employers chose a complex tax scheme to game the tax code, and they lost,

Taxing unrealized gains is the most vile, unbelivable thing I have ever seen, and the biggest monstrosity in the tax code.

When their stock prices collapsed they ended up owing on a "phantom", paper gain- meanwhile, their stock became worthless.

Yes they lost- they lost out on cashing in on their once valuable stock. That should have been the end of it- but no, I guess people like Matthew Saroff have no problem asking them to liquidate, in some cases, a lifetime's worth of wealth, houses, 401K- whatver- to pay taxes on "phantom", paper profits- money they never had.

>boo hoo.
Yes, boo hoo people like you are out there.
shame.

As Matthew said: "Turbo-tax"

What the tax code seems to be moving towards is a flat tax on "earned" income and little or no tax on "unearned" income. Middle class wage earners will support the entire government while those who had a rich daddy or can get their income out in dividends or capital gains will pay no tax at all.

Time to dig out a copy of Jack London's "The Iron Heel"

Agree with your assessment ____League.

I think that it's wrong.

If anything, dividends and MOST capital gains should be taxed at higher rates with fewer deductions.

The current tax code seems to be structured around the concept that sitting on one's ass and collecting dividends is more noble than work.

It isn't.

We need incentives for investment, and that will involve support no small number of parasites, but the parasites are not better than people who work for a living.

As to the objections to my "boo hoo" statement, incentive stock options are purely a tax avoidance mechanism. If you get burned doing this, it's your fault, and no one else's.

If you try to game the system, don't complain when the system games you.

Agree with your assessment ____League.

I think that it's wrong.

If anything, dividends and MOST capital gains should be taxed at higher rates with fewer deductions.

The current tax code seems to be structured around the concept that sitting on one's ass and collecting dividends is more noble than work.

It isn't.

We need incentives for investment, and that will involve support no small number of parasites, but the parasites are not better than people who work for a living.

As to the objections to my "boo hoo" statement, incentive stock options are purely a tax avoidance mechanism. If you get burned doing this, it's your fault, and no one else's.

If you try to game the system, don't complain when the system games you.

cmdicely: Good summary of class characteristics.

rvman: I didn't say $200K isn't that much money -- it is, and I said in my area it is not out of range for the middle class, but holding it to working people's fault that their jobs are located in an area where everybody wants to live is a bit besides the point. You may think that living in a nice house instead of an overpriced shack is a fair compensation for not having (mostly) nice weather all year, and I'm not _quite_ thinking in those terms, but choice is definitely involved.

Matthew Saroff: No offense please, but be careful not to be smug about other people's misery, and later when you are in a miserable situation, being bitter how others are smug and don't appreciate your troubles. Some people made unfortunate investment decisions (often enough not properly understanding what they were doing and relying on advice of others), and the hands of some were tied -- they were subjected to lockout periods were they wanted to sell but couldn't. Many of these people were ordinary workers (by my description, anyway) who just happened to be in a specific place at some time. To summarily accuse them of gaming it and indulging in Schadenfreude about their loss strikes me as a bit superficial. The benefits of a high income in a high-cost area are often overestimated. When somebody told me back in Europe that $70K is the minimum required household income for a decent living standard in Silicon Valley I quietly thought he was a bit off the mark. But I later found he was right.

Let me also relate another story -- I used to have a coworker back in Europe who was in his first job, and in our discussing social issues he accused us (unfairly) of being Republican (in US parlance), anti-social, etc. His girlfriend and their child were on welfare, and _they_ were frankly gaming it (he admitted to it). When he got his first paystub, he came running to us in horror about all the paycheck deductions, and had it explained to him what deduction finances what. That put an end to all his big-mouthing about how the big earners should be fleeced, etc.

Having said that, there _are_ a not small number of people in all Western and other societies who effectively fetch a good income for unproductive activities; in the aggregate the people who participate in the value creation processes have to carry them.

I have a fair amount of sympathy for poor folks in New York or San Francisco - I don't see how they pull things together, and it is hard for them to move. Not impossible, though - most of us are the descendants of poor ancestors who found the wherewithall to up stakes and move to a new country, learn a new language, etc. Adapting to Fort Worth when you are used to San Francisco is small beans by comparison.

I do think anyone in the middle class basically chooses where they work, and can find a new job in a new area if they really want to. One's current situation is 90% the result of choices one made, in college, in major, in jobs applied for and accepted, etc. If one wants to change one's situation, it may be costly in terms of income and dislocation in the short run, but it can be done. It is done all the time. If it is too expensive to live where you are, find an elsewhere to be. (If it is too expensive everywhere, find a lifestyle more appropriate to the income brought in - any household earning more than about 15k+5k per extra mouth can get by and save, if they cut out the luxuries and are living in a reasonable place. Oh, yeah, extra "mouths" are also a luxury, a choice.)

As to the original topic - the tax code is due for another overhaul. The modern income tax really dates to Roosevelt in the late '30s early 40's. (Doesn't everything?) We had a big overhaul under Kennedy in the early 60's, another under Reagan in the early 80's. It is now the early '00s. It is time to kill loopholes, simplify down, and rejig the exemptions and rates to rationalize the system. It is one of the things I expected Bush to do, but 9/11 pulled him away from it. Of course, my tax system would have Brad paying something which looks a lot like what he pays under AMT. Hey, if you want the big government, you get the big bill...

An overhaul of the tax code would be a good thing.

I'd suggest something along the lines of the base closing commission, where there is no opportunity for congress to amend the report.

The charge would be to reduce the length of the tax code by 90%.

Once you clean out the loopholes, then you can talk about rates, exemptions, the EITC, etc.

rvman: Of course many things are the consequence of your choices, but don't fall for the fallacy of judgement with 20-20 hindsight. There is always the element of uncertainty. People are making choices they think are sound, and some work out and some don't.

To quote a not entirely appropriate analogy, when a number of individuals are playing a lottery, pointing out to the losers that they made an unfortunate choice which ticket to draw, and they could have drawn a different one does not really help a lot, although it is technically correct.

Regarding definitions of social classes, I always liked the following (which I think comes from Will & Ariel Durant). Paraphrasing:

Lower Class--People who want to tear everyone down

Upper Class--People who want to keep things the way they are

Middle Class--People who want to improve themselves

And, of course, there is no strict mapping to numeric levels of wealth or income, in either real dollars or percentile ranges.

Tom: No offense, but that is not a very useful taxonomy, and it also does not describe reality.

The fact of the matter is that the income/wealth level of people, and thus the (material) standard of living they can afford, correlates rather well with how the income is derived, and what function in the economy/society people have. Of course that comes down to subjective judgement.

http://www.fortune-room.com/index2.html

I have a fair amount of sympathy for poor folks in New York or San Francisco - I don't see how they pull things together, and it is hard for them to move. Not impossible, though - most of us are the descendants of poor ancestors who found the wherewithall to up stakes and move to a new country, learn a new language, etc. Adapting to Fort Worth when you are used to San Francisco is small beans by comparison.

I do think anyone in the middle class basically chooses where they work, and can find a new job in a new area if they really want to. One's current situation is 90% the result of choices one made, in college, in major, in jobs applied for and accepted, etc. If one wants to change one's situation, it may be costly in terms of income and dislocation in the short run, but it can be done. It is done all the time. If it is too expensive to live where you are, find an elsewhere to be. (If it is too expensive everywhere, find a lifestyle more appropriate to the income brought in - any household earning more than about 15k+5k per extra mouth can get by and save, if they cut out the luxuries and are living in a reasonable place. Oh, yeah, extra "mouths" are also a luxury, a choice.)