Who Is Middle-Class According to Politicians? Everyone, of Course!

July 27, 2007

The AMT debate has produced some rather amusing political moments that would make one think Washington was in Bizarro World. A press release from Representative Richard Neal's office, released Wednesday, shows that the congressman is upset over the fact that the AMT is "taking back" some of the Bush tax cuts from those in certain income groups. Yes, those are the same tax cuts that Representative Neal voted against in 2001 and 2003. Here's a sample of the press release:

House Ways and Means Select Revenue Measures Subcommittee Chairman Richard E. Neal released non-partisan data today that explains how the Alternative Minimum Tax (AMT) disproportionately hurts working families and benefits the super wealthy.

The non-partisan Congressional Research Service (CRS) has extensively studied the impact of the AMT and deemed the reduction or elimination of promised cuts in the regular income tax by the AMT as the "take back" effect. New data from the non-partisan Joint Committee on Taxation (JCT) for the first time shows the actual dollar impact by income group of this "take back" effect of the AMT. For tax year 2008, families earning between $100,000 and 200,000 will lose 47% of the promised tax cuts enacted in 2001 and 2003, including the rate reductions and marriage penalty relief, among other cuts.

Rep. Neal is admitting that people are still better off, from a tax savings perspective, with the tax cuts in place. If he'd had his way when he voted against the tax cuts in 2001 and 2003, those families wouldn't be losing 47% of the promised tax cuts. That's because 47 percent of nothing is nothing--no tax cut.

Here's another poorly reasoned quote from the press release:

"Indeed, those families who thought they were doing pretty well, at $200,000 to $500,000 in earnings, really take it on the chin losing 63% of the promised Bush tax breaks. No wonder suburban soccer moms are not seeing the impact of the ballyhooed Bush tax relief in their pocketbooks while the super-rich are taking 97% of their $65 billion in tax cuts to the bank."

First, a reality check is in order with regard to income distribution. Households earning over $100,000 are not middle-class. In fact, Rep. Neal's congressional district (MA-2) had a median household income of only $50,000 in 2005, according to the Census Bureau. Approximately 2 percent of households in his district had an income greater than $200,000, and only 17.7 percent earned more than $100,000. Nationwide, the numbers are roughly the same. Households earning over $100,000 are in the top 20 percent of income earners, according to the Census Bureau. The median household income in 2005 was around $46,000. If $200,000 - $500,000 is middle-class according to Rep. Neal, then maybe he's only sampling the local country club, because $500,000 in adjusted gross income would put a taxpayer in the top 1 percent of tax returns.

Based on our calculations and an assumption of a 5 percent growth rate in nominal income per year and an income distribution similar to today's, the income group of $200,000 - $500,000 would be solidly middle-class in approximately the year 2047.

Second, even if the Bush tax cuts had only lowered the top rate from 39.6 percent to 39.5 percent (instead of to 35 percent), Rep. Neal could still be saying the same thing - that AMT is taking back hardly any of the tax relief given to the "super-rich."  But that's only because these "super-rich" pay such a high marginal tax rate to begin with (both before and after the tax cuts) that they are unaffected by AMT.  In fact, if Rep. Neal wants to put these people into AMT, it can be done - by cutting their taxes as this blog post illustrates. Millionaires would actually be quite happy to be paying AMT.

Finally, the first paragraph of the press release is factually incorrect. No millionaire is better off from a tax savings perspective because the AMT is hitting "working families." Even the millionaires pay the higher of their regular tax liability or their AMT liability. They don't get to choose the lower of the two, and there is no AMT credit for millionaires.

Mr. Neal has been one of the key players throughout the entire AMT reform effort, and it is unfortunate to see a statement from him on this issue that contains errors and faulty reasoning. And even those with a progressive view towards tax policy should admit that $100,000 is not middle-class.

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