Many years ago I heard the theory expressed that taxation was a new form of exploitation of the working class that had reached confiscatory levels. I never imagined that one day this would be the horrific reality facing my own daughter.

Our family has a joke that my middle daughter, Karen, is the black sheep of the family because she was so financially successful. Now her American dream had been transformed into a nightmare.

Bright, beautiful and generous, in 1985 she became an electronics engineer and soared in the world of high tech. Working as an account manager in Silicon Valley, she earned in the range of $75,000 to $100,000. In 1998, she accepted an offer at a startup company with a lower salary, but with stock options as part of the compensation. Dreaming of rescuing all her impoverished relatives and funding various justice campaigns, in 2000 she exercised her stock options. On paper, she was a millionaire. Almost immediately, the stock began to slide, and before she could sell, it was almost worthless.

Enter the IRS, and something called the alternative minimum tax (AMT). The AMT was designed to make rich people pay taxes, no matter how many loopholes they use. But for Karen, this means she owes taxes on all the paper profits she made with her tax options. Her wealth evaporated before she could touch a dime of it, but the taxes stayed very solid. In April 2001, she found that she owed over a million dollars in taxes on stock that was only worth a few thousand. The IRS turned down an offer to compromise, saying they would take everything she owns, and for the next four years she and her husband will pay all their earnings to the IRS except for a $1,200 per month living allowance for a family of three.

She is not alone in this nightmare. Thousands of other high-tech workers are in similar dire straights. Some have complained of indentured servitude.

In addition to high-tech workers and some others who are being taxed way more than their income, by 2010, 33 million families, 96 percent of them middle class, will be paying higher tax rates due to the AMT. That’s because the income level that triggers that AMT hasn’t been adjusted for inflation since the law was passed in 1970.

You might think that this is all some ghastly mistake. But there is method in this madness, as summed up in the title to the new book by New York Times reporter David Cay Johnston: “Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich and Cheat Everyone Else.”

“Most Americans depend on wages for their incomes,” Johnston writes, “wages that are tracked closely by the government and leave little opportunity to escape taxes. The super rich are different. They largely control what the government knows about their income – and there lies the real issue about our tax system. The rich have myriad ways to avoid recognizing income for tax purposes, most of them perfectly legal.” (See related story, page 15.)

It is not only professionals like Karen who are singled out by the IRS. Under pressure by the Republican congress in the 1990s, the IRS stepped up harassment of low-income workers claiming the Earned Income Tax Credit (EITC).

Taxation has not been effectively addressed by many on the left except to beat the drums for passage of measures to support basic services that are needed by everybody. Unfortunately, the resentment felt by working people has mainly fueled reactionary, right-wing programs. They have used anti-tax sentiment to justify draconian cuts in education, health care and other basic services, while justifying tax cuts that primarily benefit the very rich.

Many economists and politicians think the AMT is sure to be changed in the near future. We should all support reforms that eliminate its burden on middle-income workers and professionals, and end the persecution visited on families like Karen’s. But this shouldn’t be an excuse for eliminating the AMT on the really wealthy. On the contrary. The only way to really ease the burden of taxes on working Americans is to restore a real progressive system that taxes the rich and the big corporations.

The author can be reached at pww@pww.org.

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