Could a New Tax Cut for the Rich Be Obama’s First Tax Change?

December 30, 2008

Rep. Richard Neal of the Ways and Means Committee (a winner of the Tax Foundation’s Distinguished Service Award) wants to expand the tax exemption for private-activity municipal bond interest, making it exempt from the AMT. This income source is already exempt from regular tax rates, although Tax Foundation economists have argued that it should not be.

Neal’s justification is that it would be a good economic stimulus, but if that’s his rationale, then he should be proposing a temporary measure of one year’s duration or two at the most.

Neal knows the history of the AMT, so he knows that the municipal bond interest loophole is one of the big reasons we have an AMT in the first place. As Michael Barone and Bill Frenzel have recalled, automobile heiress Mrs. Horace Dodge had invested her millions in municipal bonds, which made her one of the 155 millionaires who paid no income tax in 1969. This caused such a ruckus that Congress enacted the AMT.

Even if the AMT’s enactment in 1969 was partly a panicky PR response to a muckraking news report, it actually did make our income tax fairer. People with similar incomes started paying more similar taxes.

Tax Foundation Chief Economist Patrick Fleenor has railed against the municipal bond exclusion, calling it a $20 billion gift to the nation’s wealthiest investors and urging Congress to improve the AMT instead of putting more loopholes in it, as Rep. Neal’s proposal would do.

And Tax Foundation economist Gerald Prante has compared the income levels of the people who own municipal bonds to those who get other popular tax preferences. In 2007 no widespread tax preference was more disproportionately favorable to high-income people. More than 70 percent of the tax savings were declared on the tax returns of people in the top 10 percent of the income spectrum. That’s more “pro-rich” than the Bush tax cuts.

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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.