Thursday, October 20, 2005

The Alternative Minimum Tax: A Limited Appreciation

by Tom Bozzo

No, I am not kidding.

According to reports on the mishmash of fantasy and reality that's expected to emanate from the tax reform commission, permanent elimination of the dreaded AMT will be one of the recommendations. It's also one of the few that Congress might be tempted to enact, as it's in the position of having to pass temporary AMT relief provisions (which, full disclosure, thanks to a new larger mortgage and the arrival of a second child, kept me from paying a small AMT liability in 2004, and will likely do so again in 2005).

There's not a totally invalid concern that the AMT will rapidly reach down from the upper-upper middle class to the lower-upper middle class, partly because it does not have the regular income tax system's inflation adjustments for tax brackets and exemptions, and more significantly because it helped the original Bush income tax shift show a smaller effect on the government's finances. It's also almost a parody of tax complexity that you have to fill out a worksheet to find out if you need to fill out the form that will tell you if you owe AMT.

But there is ample bullshit, too, like this characterization of the AMT from the New York Times:
The alternative minimum tax, a steep levy faced by an increasing number of middle-income taxpayers, would be abolished.
The "middle-income" characterization is one problem: Based on 2003 tax statistics (Excel file; the latest data available from IRS), you have to have an AGI in approximately the top 30% to have even a theoretical risk of AMT liability. People with actual middle incomes don't make that much money, though 70th percentile income earners are not rich.

The "steep levy" characterization also is highly questionable. The AMT tax rate is 26%, for pete's sake, which prior to the Bush tax shifts was a lower rate than all but the first regular income tax bracket; for a joint-filing couple, the AMT rate is zero on the first $58,000 in income ($49,000 without the temporary fixes); and the AMT permits mortgage interest and charitable contribution deductions. My AMT liability would be lower than that under the regular income tax; even without the stopgap fixes, I could not look at any of you in the eyes and call the result burdensome.

So strip away provisions pertaining to some exotic forms of income, and the AMT is a flat tax with a big zero bracket and a couple popular deductions. So the proposal to eliminate AMT, as opposed to simplify it, fix some details (adjust the zero bracket for inflation, e.g.), and make AMT the regular tax system boils down to No Pony for the Flat Taxers (link via Economist's View).

Additionally, since there's no reason why the AMT rates couldn't be more progressive, failing to do the same with a graduated rate structure is arguably No Pony for the Tax Simplifiers either.
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