Tax Cut Benefits Disappearing

Study says nearly all in middle, upper middle class will lose benefit of the Bush tax cut

Author: CNN / Money

Published: September 19, 2002

NEW YORK (CNN/Money) - Many middle- and upper-income families will miss out on the Bush tax cut in the coming years as they're thrust into a less favorable tax system, a study reveals.

The report, released Wednesday by the nonpartisan Tax Policy Center, found that 85 percent of taxpayers with two or more children will be forced off the regular income tax and onto a separate system known as the alternative minimum tax (AMT) by the end of the decade, when the tax cuts introduced by the Bush administration become fully effective.

Only a couple of years ago, fewer than one million taxpayers, most at the upper reaches of the income spectrum, were subject to the complex separate tax. But if nothing is changed, by 2010 about 36 million taxpayers will be stuck paying the higher tax.

The study is the latest to project problems for a large segment of taxpayers during this decade. The Internal Revenue Service's taxpayer advocate and the Joint Committee on Taxation, which provides tax bill estimates for Congress, have made similar projections.

The main reasons are that the AMT is not indexed for inflation, meaning it strikes a growing number of taxpayers as their incomes rise. In addition, last year's 10-year, $1.35 trillion tax cut reduced regular income taxes, but did not make any cuts in the AMT rates.

The study also found that by 2010, 53 percent of taxpayers earning under $100,000 will pay the AMT, compared with 24 percent in 2002.

In recent years, Congress has passed temporary fixes to prevent the tax from hitting too many middle-class taxpayers, which could have severe political repercussions. Repealing the tax outright, however, could cost as much as $750 billion if it is done in the later years of this decade, according to the House Ways and Means Committee.

The Tax Policy Center study said the AMT could be changed so that it focuses mainly on upper-income households, or last year's income tax cuts could be frozen at 2002 levels and the alternative tax repealed -- a plan that would still cost $285 billion.

Still, the study's authors say Congress will eventually have no choice but to deal with adjust the AMT for inflation. The IRS taxpayer advocate also has pushed for repeal, in part because of the sheer complexity of the alternative tax.

The AMT is a highly complex parallel to the regular income tax system designed in 1969 to ensure 155 wealthy people paid some tax. It eliminated many of the deductions upper income taxayers are able to claim. Trouble is, the system has not been adjusted for inflation, so each year it encroaches on a growing number of middle income taxpayers.