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The Incredible Swelling Tax

Long a bane of the rich, the alternative minimum tax (AMT) is soon to become a middle-class problem. By 2010, a third of U.S. taxpayers will be paying the AMT rather than the lower regular tax, according to a new study by economists Leonard E. Burman, William G. Gale, Jeffrey Rohaly, and Benjamin H. Harris of the Urban-Brookings Tax Policy Center, a joint project of the two Washington think tanks the Urban Institute and the Brookings Institution.

The AMT has been part of the tax code since 1969. It was originally aimed at closing loopholes that allowed 155 families with incomes of more than $200,000--a princely sum in those days--to pay no taxes at all during the 1968 tax year. Since then, the tax's reach has gotten far wider. By the end of 2002, about 2.6 million taxpayers will be hit by the AMT, which will force them to pay more than they would have otherwise. Taxpayers must pay the AMT if it is greater than the taxes they would owe under the regular tax system.

And because the AMT is not indexed to inflation, almost 36 million will pay the tax by 2010, according to forecasts by the authors of the study. Many of these will be families with incomes under $100,000 in the year in which they have to file taxes. Among couples that are married, with two kids and household income of $75,000 to $100,000, 99% will be hit by the AMT, reckon the authors of the study. "That's astounding," says Gale. "We're talking about, say, a cop and a nurse."

These higher tax bills will wipe out the effect of the tax cuts slated to take effect over the next few years. For example, for households earning $75,000 to $100,000, the AMT reduces the value of the tax cuts by 42%.

Why does the tax hit these households? In part, under the AMT, taxpayers cannot deduct from their income any exemptions for children, or for state and local taxes. These exemptions make a big difference to middle-income families' tax bills.

Revamping the AMT to help these families would cost the government a lot in tax receipts. As it stands, the revenues brought in by the AMT are a major reason why the Congressional Budget Office's budget projections show a surplus by 2006. Just indexing the income calculations in the AMT to inflation would cost $400 billion to $500 billion in lost tax revenue between now and 2012. Perhaps that's why the Bush tax cut gave individual taxpayers relief from the AMT only through 2004. After that, the number of AMT payers will balloon.

The authors' suggestion: Repeal the AMT, which burdens the middle class unduly. Instead, they argue for making up the lost revenue by simply closing the loopholes in the regular tax system that lower taxes for the rich. One of the expectations about the current global recession was that it would strangle Europe's budding venture-capital industry that began in earnest only in 1998.

In fact, European venture capital may have more staying power than the experts thought, according to the latest numbers on worldwide venture capital in 2001 from PricewaterhouseCoopers and British venture capital investor 3i. While the amount of new private equity investments in Europe dropped by 33% between 2000 and 2001, that was less than the 57% decline in the U.S. All told, the top five countries in order of total dollars invested in 2001 were the U.S., Britain, Germany, Canada, and France.

More important, Europeans did not abandon earlier-stage investments for safer later-stage investments, as had been feared. Despite the downturn, fully half of European venture funds invested in 2001 went into companies either starting up or in early stages of growth. That was down only six percentage points from 2000. By comparison, in North America, the portion of money that went into startups or early-stage investments dropped from 61% to 51%. This suggests that European startups may be well-placed to ride the next innovative wave when the global economy turns up again. The tech sector may be in a funk, and venture capitalists on hold, but companies are still obtaining U.S. patents at a near-record pace. Through Sept. 10, the U.S. Patent & Trademark Office was issuing utility patents at an annual rate of about 162,000, second only to the pace of 166,000 in 2001. Utility patents--unlike design or plant patents--are granted for inventions of machines, processes, and products.

The rate of patent grants reflects the surge in innovation during the late 1990s boom, since there's typically a lag of at least two years between the time when a patent is applied for and when it's granted. So far, there's no sign from patent data that the bursting of the tech bubble has brought innovation to a standstill. The number of applications for utility patents rose 10% both in 2000 and in 2001, the last year for which data are available. Foreigners made 46% of the applications, about the same as their peak share of applications in the late 1980s and early '90s.

Meanwhile, applications for trademarks are rebounding, a sign of continued creative ferment. From a low point of about 47,000 in the fourth quarter of 2001, trademark applications rose to 51,000 in the first quarter of 2002 and over 55,000 in the second quarter. NameProtect Inc. in Madison, Wis., which analyzed the trademark data for a new quarterly publication called Trademark Insider, says the five leading trademark applicants through June of this year were Mattel, Pfizer, AOL Time Warner, Viacom, and Hasbro.

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