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Why the Bush tax cuts overpromised and underdelivered

For many of the people whom President Obama calls “rich,” the Bush tax cuts didn’t make much difference. That’s largely because of the Alternative Minimum Tax.

Now that the Bush tax cuts have been extended for two more years, let me share a dirty little secret with you. It’s this. For many of the people whom President Obama calls “rich,” including me, the Bush tax cuts didn’t make much difference.

That’s because of the Alternative Minimum Tax, which was created 40 years ago to foil rich tax dodgers but now doesn’t affect people with income in the high six digits and above. Instead, the AMT has become the bane of the middle- and upper-middle classes, especially those of us who live in high-cost, high-tax areas. Washington won’t fix or eliminate the AMT because the government would have to raise tax rates or pare back deductions to fill the ensuing revenue gap.

To Obama, all families with at least $250,000 of annual income and single taxpayers with $200,000 are “rich.” But to the AMT, many of them are prey. This parallel tax, which allows fewer deductions than the regular tax, ensnares millions of taxpayers with incomes of $75,000 through $600,000. There’s no cost-of-living adjustment for this tax or Obama’s definition of rich. For example, according to CNNMoney’s cost-of-living calculator, making $250,000 in New York City’s Manhattan (that’s “rich”) is like making $110,000 in Manhattan, Kans. (not rich).

The Tax Policy Center says that three-quarters of taxpayers with incomes between $200,000 and $500,000 lost almost two-thirds of their Bush tax cut to the AMT. “Those people really got clobbered,” says Roberton Williams, a TPC senior fellow. “On average, they lost 63% of their Bush tax cut.”

He could have been talking about me. My family’s income is in the middle of that range. Combine our income with the fact that we have no mortgage debt and pay high state and local taxes, and we’re prime meat for the AMT.

The experts at CCH, a tax information and software firm that has no dog in Washington’s tax fights, estimate that the AMT clawed back 64% of my Bush tax cut. That’s courtesy of Phil Schwindt, a CCH senior tax research analyst with whom I shared my 2009 income and deduction figures (which I’m not going to share with you). Schwindt estimated how much I’d have to pay under the pre-Bush-cut rules if my 2009 numbers applied to 2011; how much under the recently passed compromise plan; and how much under Obama’s original plan to end Bush’s cuts for “the rich.”

It was shocking. Under the compromise plan — which, remember, is keeping the Bush tax cuts in place — $8,637 of my $13,491 savings would be clawed back by the AMT. Even more telling, there’s little difference in my taxes between the compromise plan and Obama’s proposal. My regular tax is $1,439 lower, but my AMT is $1,209 higher. (I’m not including the $2,136 I expect to save from the one-year reduction in Social Security taxes, because that’s totally unrelated to the Bush cuts.)

Schwindt says that I’m in an AMT “phase-out” bracket in which lower regular taxes are almost totally offset by a higher AMT. If I earned about $100,000 more — boss, can you do something? — my marginal tax rate would drop to 28% from the current 35%. If I earned $600,000 or more — fat chance! — the AMT wouldn’t affect me at all.

Back in 2000, Bush tax techies admitted (but didn’t stress) that 25% of Bush’s cuts would be clawed back by the AMT. That let Bush promise cuts with a stated value of $1.6 trillion while taking a budget hit of only $1.2 trillion. For people caught in the AMT — a lot of us, but a decided minority — the percentage hit is well over 25%.

I don’t mind my total tax bill, given the terrific opportunities that this country has given my family to succeed. What annoys me is how convoluted the system is, and the way Obama and the Republicans both carry on about my supposed Bush benefits. Obama wants me to feel guilty about being “rich” when I’m well-off but not rich; the Republicans want me to kiss their feet. Yes, the cuts save me about $5,000 a year, which I’m glad to have. But they piled up huge federal debts for my kids and grandkids. Not a trade I’d have made.

So the next time a slick salesman like Bush or Obama tells you how much in taxes he’s going to save you, be skeptical. And get your calculator out.