Tuesday, April 18, 2006

Treasury Places Tax Cuts on Dividends and Capital Gains as More Critical than LT AMT Fix

Treasury representative Tony Fratto chose "1040" day (April 17) to express that extension of capital gain and dividend tax cuts were more urgent than extending the AMT patch. Fratto said that while the AMT needed attention, no action was required until next January since that would start the next filing season. In the meantime, Fratto asserted, investors needed to ensure the continuation of the portfolio tax cuts to maintain economic momentum for the present mini-boom. House Minority Leader Nancy Pelosi (D-CA) quickly seized on the opportunity to portray Republicans as callous toward the concerns of working Americans. She claimed that millions of families would effectively see a tax increase. Tax reform apparently is now SO 2005; it barely got mentioned.

Although Ms. Pelosi remarks were excessive, her basic point, in my opinion, is valid. Taking AMT out of the picture for taxpayers earnings less than $120,000 if MFJ (married filing jointly), $80,000 if single and $60,000 for MFS should be a very high priority--likewise, even those earning over these amounts should be protected from the AMT if 80% or more of all income is from earnings (whether W-2, Schedule C, Schedule E (if active participant in partnership or Subchapter S business) or Schedule F). Finally, the above numbers should be indexed for inflation. On the dividend/capital gain front, my preference would be for inflation-adjusted gain taxation; since that probably is unrealistic, I would favor a small unified exemption (perhaps $200-$500) amongst capital gains, dividends and interest with the rest taxed at a maximum rate equal to the second lowest tax rate (the relatively few low-income taxpayers with capital gains, dividends and interest in excess of the exemption would, of course, get to use the lowest rate).


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