Bush Tax ‘Cuts’: a Dirty Deal for the Middle Class

Ready for an unpleasant shock? Try this quiz:

* George W. Bush’s well-known pro-family, pro-marriage views are reflected in his most important domestic initiative. True or false?

* Bush’s 10-year “across-the-board” income tax reduction--now the law of the land--will benefit wealthy taxpayers most, but all taxpayers will get their fair share because it’s their money, not the government’s. True or false?

* While the tax cuts won’t simplify the annual misery of filling out IRS forms, matters aren’t going to get worse either. True or false?

For middle-class and upper-middle-class taxpayers, the answer to all three: false.

Stand by, America. Families that earn $75,000 to $500,000--those income tax payers who shoulder half the burden of total income tax payments--are about to get a surprise kick in the wallet. If you’ve closely followed the details of the president’s 2001 phased-in tax cut, you are vaguely aware this nightmare is coming. But now a study by the respected Tax Policy Center has spelled out the gory details.

The aggravating marriage penalty in our tax law is about to get worse. The well-established and justified favoritism that our tax law shows for families with children is about to be radically rolled back for middle-class and upper-middle-class Americans. As for the supposed benefits of this across-the-board tax rate reduction? Well, the middle classes will end up with pennies on each dollar promised before it’s over, and less each year. And if you think filling out your tax form is complicated now, it’s going to be doubly difficult in the years to come.

The overall result will be a significant shift in tax burden from the wealthy to those in the middle classes. Consider two groups of taxpayers: Those earning $100,000 to $200,000 now account for 22% of total federal income taxes owed to the government. That’s the same percentage shouldered by those earning more than $1 million. By 2010, however, the share paid by million-dollar-earners will drop to 18%, while the lower-earning group’s share will rise to 27%.

“Hammering the middle class doesn’t make any sense to me,” says Leonard E. Burman, a coauthor of the study and director of the Tax Policy Center, a joint venture of two heavyweight Washington organizations--the Brookings Institution and the Urban Institute.

It makes no sense to me either. Except by the law of unintended consequences. A generation ago, in answer to a public outcry, Congress approved something called the alternative minimum tax. It was a scheme to snag a few rich people--precisely 155 of them in 1969--who took advantage of exemptions and loopholes to avoid paying any income tax. The trouble is, what was considered wealthy in 1969 is now more or less just a good income. As the Tax Policy Center put it, this once-targeted “class tax” is about to become a “mass tax.”

The dirty secret of Bush’s tax cut is that while ordinary income tax rates were reduced across the board, the rates and terms of the alternative minimum tax went unchanged. Taxpayers in the middle classes looked at the new, lowered rates promised under Bush’s package and anticipated their benefits. But many of them did not realize they would answer instead to this different tax formula.

Last year, barely 2% of the nation paid these alternative rates. By 2010, they will apply to a majority of people earning between $50,000 and $100,000 and 95% of those who earn between $100,000 and $500,000, according to the tax center’s study.

How is the AMT calculated? You’ll have to ask your accountant. Don’t have one? You will. The alternative minimum tax will require millions of Americans to compute their federal taxes twice--first under the regular schedule and then a second time at a tax rate of either 26% or 28% of income without benefit of personal exemptions, meaning exemptions for children, or standard and itemized deductions for such things as state taxes. You’ll have to pay the greater amount.

Because the alternative tax will grab taxpayers incrementally, according to individual circumstances and the gradual phase-in of Bush’s tax cuts, the outcry has been muted so far. But don’t expect it to stay that way. By 2010, this higher alternative tax will bring in $141 billion to Washington.

The Tax Policy Center’s appalling findings are the best reason yet to reopen debate on Bush’s tax cuts, and now--before the alternative tax becomes the mainstream tax.

Yes, whether the nation can afford a sweeping reduction in revenues during wartime remains a burning question, but there should be no question that it’s wrong to penalize marriage and families, to shift a greater burden of government finance to the middle classes and to make tax day an even more complicated ordeal.