Monday, May 23, 2005

AMT May Be Next Tax Eliminated

The Washington Times reports that a bipartisan group of senators has proposed eliminating the Alternative Minimum Tax (AMT), since inflation has caused it to hit the middle class, rather than just the wealthy, as had been originally intended. Other senators have countered that it should be cut, rather than eliminated. Link.
Four senators -- two Republicans and two Democrats, including leaders of the Senate Finance Committee -- plan to introduce a $611 billion bill this week that would repeal the tax. The committee scheduled a hearing for today to examine the uncontrolled expansion of the tax. [...]

They object to the tax's growing reach and the burden it puts on unsuspecting taxpayers: higher tax rates and fewer tax breaks. Those affected must calculate their taxes twice, under the regular tax system and then the alternative system, and pay the higher amount.
"The time and the bureaucratic water torture that this tax puts people through just seems to me to cry out for reform," Mr. Wyden said.
Congress created the tax in 1969 after discovering that 155 wealthy filers had not paid taxes. At the time, lawmakers estimated the tax would affect one in 500,000 taxpayers.
As a result of inflation, an increasing number of taxpayers are covered by the tax.
The Congressional Budget Office (CBO) last year predicted that the tax could hit as many as one in five taxpayers in 2010, including virtually all married couples with incomes between $100,000 and $500,000. [...]

Instead of repealing the AMT, lawmakers could free many families from the tax by eliminating some unintended effects. Congress did not intend that families pay the tax just because they had many children or lived in states with high property and income taxes.
The CBO estimated that one-fifth of taxpayers could be freed from the tax in 2010 if children were treated the same under the regular tax system and the AMT. That change would cost about $175 billion over a decade.
If deductions for state and local taxes paid on income and property were similarly changed, about one-third of those projected to pay the tax in 2010 would be dropped from its rolls. That would cost about $360 billion over a decade.
Combining those two options would drop 18 million taxpayers from the tax in 2010 at a 10-year cost of $440 billion.

The AMT was passed as a vengeful measure to "get the wealthy." It is therefore no surprise that it is a bad tax, and that its consequences are far different than its original intent.

The concept of the tax is defensible if the particulars are radically changed. Legislators were horrified to learn that the super-complex tax code they had created led to different people with identical incomes paying very different taxes. The intelligent alternative would have been a simple, flatter tax, with no deductions or credits and low marginal rates. Instead, they created just such a flat tax, but only as a backup for people who got to deduct "too much." The AMT would be a much fairer tax than our current income tax, if it were the primary tax, rather than a backup that hits only some payers.


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