Extra gains taxes cost investors $7 billion

Alternative minimum is blamed in study

May 10, 2006|By NEW YORK TIMES NEWS SERVICE

WASHINGTON -- Because of the alternative minimum tax, more than a third of investors last year paid taxes on their long-term capital gains that were higher than the 15 percent rate sponsored by President Bush, a new congressional report shows.

These investors paid more than $7 billion in higher federal and state taxes than they would have under the regular income tax system, according to calculations by The New York Times based on the report. Under the alternative tax taxpayers lose exemptions for their families and receive fewer deductions for their state and local taxes and some medical bills.

Last year, some investors paid 31.3 percent of their gains in combined federal and state taxes, based on the report issued yesterday by the Joint Committee on Taxation, the official congressional scorekeeper on the costs and benefits of tax law changes.

The report was requested by House Democrats, who say they believe taxpayers making $75,000 to $500,000 would support them if the taxpayers understood how the alternative tax takes back a third or more of the Bush tax cuts.

They are expected to call attention to the report's findings on the House floor today, when a $70 billion tax cut bill comes up for a vote. Republicans in Congress reached agreement on details in the bill late yesterday.

`AMT patch' sought

Bush has called for restoring for one year the exemption that protected more than 15 million taxpayers from the alternative tax.

The exemption, known as the "AMT patch," expired at the end of last year. Because the alternative tax is little known, and few understand its interactions with the regular tax system, the estimate raises questions about whether investors know for certain what their tax burdens will be when they file next year.

The Bush administration and House Republican leaders have said investors need to know what tax rate they will be paying if the government is going to encourage investment.

The Republicans want to make the 15 percent rate permanent, but in the tax cut bill coming up for a vote today it would be extended only two years, through 2010.

Of the more than $405 billion in long-term capital gains last year, 34.3 percent, or nearly $139 billion, was reported by people who are on the alternative tax system, according to the joint committee's estimate.

The report also estimated that 14.9 percent of the total gains were not taxed at the reduced 15 percent rate, but were instead taxed at 21.5 percent or 22 percent, rates higher than the 20 percent rate on capital gains enacted under President Bill Clinton.

These higher taxes apply to investors with incomes of $112,500 to $382,000.

Rep. Charles B. Rangel of New York, the ranking Democrat on the House Ways and Means Committee, said it was unfair to burden merely affluent taxpayers with higher taxes, especially since most of the benefits of the reduced capital gains rates go to the richest Americans, who have incomes of more than $1 million annually.

400 taxpayers

Just 400 taxpayers, out of 145 million, collected 7 percent of all reported capital gains in 2000. The administration has declined to make public data for years since then.

"Republicans have argued these tax cuts are crucial for investor certainty, but the only certainty coming out of this bill is that the AMT will wipe away the capital gains cut for millions of middle-class taxpayers," Rangel said.

He said these taxpayers "may not receive any benefit from the capital gains cuts, but they'll shoulder the cost of this tax cut for the super wealthy."

Bill Thomas, the California Republican who chairs the Ways and Means Committee, declined to comment on the new estimate.

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