Max W. Baucus

Our erstwhile Senator Baucus is often referred to as “Republican Lite”. I object to the use of the word “lite”.

On January 4 of this year, Baucus joined a group of Senators favoring repeal of the Alternative Minimum Tax (AMT). I think he is wrongheaded about this – I think he’s gone deep right.

The concept of AMT was introduced, I believe, back in the 1960’s. There were complaints then, as now, that rich people were using the tax law to avoid paying taxes. Everyone should bear part of the load, no one should get off clean. But the original AMT, at 10%, was not very effective. Few people paid it.

In 1986 Congress, in sweeping tax legislation, toughened the law, raising the rate to 28%. (This happens to be the rate that most wages earners pay in combined income and payroll tax.) They set a high threshold – the law was designed to catch tax avoiders but spare the lower and middle classes. It was very effective – it drew complaints right away from the wealthy. But it stuck.

Here’s how it works: You figure your taxes like always – add your income, take your deductions. Then you do an AMT calculation – you add back your deductions to your income. Sheltered income is added back. Then you take an exclusion, for most people, $62,550. After that, you apply a flat rate against your non-exempt income – 28%. If the resultant AMT is larger than regular income tax, you pay AMT.

It’s more complicated than that, and it’s one of the reasons rich people need an accountants. But it’s been an effective tax over the years. It has largely achieved its purpose – it has grabbed tax avoiders, put us all on somewhat equal footing – those with expensive tax lawyers, those of us with H&R Block. Most importantly, it softened the impact of the Bush tax cuts, which were aimed almost exclusively at wealthy people. What Bush gaveth, AMT to some degree took back.

In recent years, people have been complaining about the tax reaching down and grabbing middle class folks – the exemption was left too low, and inflation was forcing people who were never its target to pay the tax.

The answer was simple – raise the exemption. It could have been raised ten years ago, five years ago. Baucus, head of the Senate Finance Committee, could simply raise it now. But Max is showing his opportunistic Republican side. He has seized this discontent with AMT affecting the wrong people, and is using it to wipe out AMT in total. He wants to return us to the days when people with high-priced lawyers and accountants avoided tax altogether.

This legislation has legs. It’s bipartisan, another way of saying we’re in for a royal screwing. Baucus has let us down, big time. He’s offering another gift to the wealthy who have already been given so much by Bush.

In the meantime, most Americans pay more payroll tax than income tax. Each year, the payroll tax goes up with hardly a peep from anyone in DC. In 2006, it was applied at 14.2% against all wages up to $94,200. (2007: $97,200.) Working and middle class people are being eaten alive by the payroll tax, which applies only to wages. Not a word from Max.

Here’s an alternative suggestion for Max: Keep the AMT, raise the exemption. The exemption should be a floating number – it should increase each year with the automatic increase in the payroll tax base. In 2006, the AMT exemption would be $94,200, in ‘07, $97,200. At that exact point when people are let off the hook for payroll tax, AMT would kick in.

That would be fair. It would put us all on the same footing. That Max cannot see this – that Max is pushing for yet another tax cut for the wealthy – he’s let us down. Big time.