Simplification is the Better Alternative to the Alternative Minimum Tax

April 16, 2007

Congresswoman Deborah Pryce (R-Columbus) submitted the following editorial:

For the vast majority of everyday Americans, their sole interface with the federal government comes during the annual spring heartburn known as tax day. Given the inherent tensions in this relationship, the cynicism many Americans feel toward their government is unsurprising. However, the growing calamity that is the Alternative Minimum Tax (AMT) has the dangerous potential to further sour this relationship.

In 1967, it was reported that 155 wealthy Americans had exploited various and legal tax shelters, credits, and loopholes, and avoided paying any federal income tax. In response, Congress devised the Alternative Minimum Tax, a parallel tax that would prevent the rich – those making approximately $100,000 a year or more -- from utilizing most deductions and ensure they paid their fair share. At the time of its passage, it was not viewed as means of enhancing federal revenue, but as a method to ensure the noble goals of equity and fairness in the distribution of the tax burden.

As painful as they often are, paying taxes is a responsibility of all Americans; likewise, if legal loopholes exist allowing the wealthy to avoid all tax liability, it is the responsibility of lawmakers to close them. But the AMT has strayed far from its righteous roots, and over the past 35 years has mutated into something else entirely -- and today it serves as an illustrative example of some of the unintended consequences of good intentions.

For those who have not been caught in the AMT net, here is how it works. Under the AMT, an individual computes his or her regular tax liability on IRS Form 1040, and then computes it again under a second system without being permitted deductions like the home mortgage interest deduction, state and local income and property taxes, and even the standard deduction for those who don’t itemize. If the amount an individual owes under the regular tax system is lower than the amount he or she would owe under the parallel AMT system, then the taxpayer must pay the AMT instead. The difference between the two can be shocking – many middle class families living decidedly modest lifestyles who were anticipating a refund can instead find themselves owing thousands to Uncle Sam.

Taxpayers with incomes between $100,000 and $500,000 are most likely to hit by the tax, but it could reach some who earn much less, but who also have an inordinate number of deductions and exemptions. To avoid the AMT, some tax advisors have suggested to clients to not claim one of their children or other tax credits and exemptions to which they are entitled. While this may indeed remove them from the AMT, it also dramatically increases their tax obligation under the regular system – another example where our 1040 meets a Catch-22.

In 1970, the first year of the AMT, roughly 20,000 Americans – our nation’s richest families -- were captured by the tax. By 2010, between 30 and 35 million textbook middle-class Americans could be hit with the tax, snaring even some individuals who make less than $50,000 a year. By 2013, the tax will hit one in three Americans, having completed its hideous mutation from a tax on the Rockefellers to a tax on every other fellow.

How did this happen? Unlike it did with the regular tax computation rate, Congress failed to index the AMT for inflation, and the income level thresholds that trigger the AMT have remained in large part static. Over the years, in repeated attempts to mitigate the number of Americans ensnared by the AMT, Congress passed temporary exemptions and deductions, the most recent of which expired at the end of 2006.

Could the AMT be abolished? Yes, but as the AMT’s mission morphed from tax justice to cash cow, our government is now fully dependent on the revenue it generates. According to the Tax Policy Center, by 2010, the AMT will raise an extra $105 billion for the federal coffers, and it would now cost the government less to repeal the regular income tax than to abolish the AMT.

While it is probable that another round of tax code band-aids may avert a middle class revolt, the AMT is yet another stellar example of why our tax system should be fundamentally overhauled and simplified, and replaced with one that guarantees the original objectives sought by the creation of the AMT – equity in the distribution of the tax burden – without socking it to an unsuspecting middle class.

Back to Deborah's Views 2007