“Progressive” is a beautiful word in liberal parts of America. And nowhere does it shine more brightly than when placed before “taxation.” Progressive taxation is the practice of taking a higher percentage of income from rich people than from less-rich people. And the federal income tax, with its higher brackets for higher incomes, is regarded as the centerpiece of progressive taxation.
But the political battle over the alternative minimum tax exposes a truth that liberals have not entirely digested: The supposedly progressive income tax is regressive for the blue states in which so many of them reside. Furthermore, the Bush tax cuts – aimed at taking pressure off the income tax – have eased some of the unfairness.
Big-hearted liberals, your writer included, can agree that the rich should shoulder more of the tax burden than the less fortunate. The problem is defining who is rich.
Incomes are higher in the blue states, but so generally is the price of housing and everything else. A family making $90,000 in Nutley, N.J., can barely maintain a middle-class existence. Yet by national standards, that family is in the top 25 percent for income. Were this household to move to Tulsa with its $90,000 income intact, it would be living high. But the federal tax code makes no distinction between what it takes to be middle class in Oklahoma and in New Jersey. As a result, the high-income regions – the generally liberal coasts and upper Midwest – get milked.
The alternative minimum tax multiplies the regional inequities. Dubbed the blue-state tax, it was created in 1969 to ensure that the top earners pay at least some federal income taxes. (Back then, reports of millionaires paying no taxes scandalized Americans.)
The alternative minimum tax was not indexed for inflation, so over the years, increasing numbers of less-than-loaded families have been sucked into it. Then, the Bush tax cuts greatly accelerated the trend. The perverse upshot is that an estimated 15 percent of households with incomes between $75,000 and $100,000 are now subject to the tax. The families most at risk are those that have children, own their homes and live in places with high taxes. (The tax does not allow deductions for state and local taxes.)
Without congressional action, 20 million Americans will get hit next year. And one out of every eight affected households will be in New York City and its suburbs.
Small wonder that New York Sen. Chuck Schumer calls modifying the alternative minimum tax “our No. 1 tax priority.” Both the House and the Senate have passed plans to deal with the situation. But Sen. Majority Leader Bill Frist is holding the fix hostage to extending tax breaks for dividends and capital gains (now that’s a gift to the rich).
Although the alternative minimum tax is an enormous issue for blue-state politicians, Republicans can’t let it rampage. The tax might not hurt as big a slice of their red-state constituents, but the ones it does are in the economic strata they count on to vote for Republicans.
Conservatives have been prancing around at the sight of liberals demanding that a tax be muzzled. The Wall Street Journal editorial page says it teaches blue-state politicians a lesson and urges them to get with the Republican program to lessen reliance on the income tax.
They ought to sign on. There’s nothing to stop liberal states from collecting some of the taxes their top plutocrats no longer send to Washington. Some are already doing it – and spending the money on their own priorities.
There’s no doubt that the exploding deficits will force Congress to find new revenues. But that doesn’t mean the blue-state middle class must go back to being the packhorse for the nation. Liberals might take another look at consumption taxes, which apply to spending rather than income. They are progressive in that the rich buy more stuff than the poor (and can no longer avoid taxes by hiding their income). And even though the poor spend a bigger proportion of their earnings, other things can be done to ease their burden.
Liberal America should embrace tax reform that serves its interests – and totally without guilt. It’s been carrying the load for far too long.
Froma Harrop is a Providence Journal columnist. Contact her by writing to fharrop@projo.com.
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