Thursday, December 15, 2005

More on the Alternative Minimum Tax

by Tom Bozzo

Max Sawicky has a pretty good post enumerating some reasons why the Alternative Minimum Tax should be disliked, along with an unimpeachable prescription that the revenue should be replaced by other means (the government needs the money, m'kay?).

I do think a couple of Max's arguments are mildly overstated. The main quibbles:

First, he complains that AMT is child-unfriendly. This is true to the extent that size of the AMT's zero-rate bracket (the first $58,000 of AMT-taxable income) doesn't depend on the number of dependents, unlike the conventional income tax. With the $58,000 exemption, though, you have to have a large brood for this to matter. However, AMT does not take away all child-related tax expenditures. In particular, the child tax credit is subtracted after the AMT calculation, though a lot (if a decreasing share) of current AMT payers will have incomes well into the credit's phase-out territory.

Second, he complains about the AMT's higher rates. This is a more normative matter, but I've previously noted that the 26% and 28% marginal rates are hardly confiscatory, especially considering that the AMT rate is zero over a range where conventional income tax rates are 10%-15%. Plus, something like 70% tax filers fall in the AMT's zero bracket. I think a better liberal AMT rates complaint is that the top rate isn't high enough, so AMT doesn't collect enough from the very well-to-do.

One of Max's other commenters rightly notes that what moves the AMT debate from quasi-farce to an insult to the intelligence of anyone who's been following the Bush tax "cuts" odyssey closely is that all of this is happening by design. Cutting the upper conventional income tax rates while leaving AMT rates unchanged (and its brackets unindexed for inflation) in the initial round ensured that AMT would take away much of the out-year "cut" for the upper-middle class, and thus made the loss of revenue look much smaller for plausible deniability of fiscal conservatism purposes.

The nudge-and-wink, of course, was that the Republicans weren't really going to stiff the upper-middle and lower-upper classes, though clearly Frist has insufficient political acumen and/or capital to pull that off. I would be remiss to note that the AMT design is such that being "stiffed" is more of an annoyance than anything. Had the temporary AMT relief not been in place last year, I'd have had roughly a $1,000 AMT bill, but my total Federal income tax still would have been less than 10% of my AGI.

That leaves me in substantial agreement with Ken Houghton, who commented yesterday that he'd be happy to pay AMT, if needed, as long as the much richer beneficiaries of the other atrocities — e.g., the capital gains and dividend rate reductions — have to pay too.

As it happens, yesterday I'd read somewhere that the latest tactic was to uncouple AMT relief from the rest of the package, so rich-state Democrats would help it through, while ramming through the rest of the package under filibuster-proof rules. That's Republican fiscal responsibility in action!
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