NCPA - National Center for Policy Analysis

THE ALTERNATIVE MINIMUM TAX SOAP OPERA

April 16, 2007

The Alternative Minimum Tax (AMT) is essentially a parallel tax system.  It affects people who tend to have high incomes, a lot of deductions and returns with complex financial or business transactions.  Presently, it is paid by fewer than four million taxpayers. But without changes in tax law, it could be paid by as many as 32 million in just three years, says Max B. Sawicky, Institute Economist at the Economic Policy Institute.

Consider:

  • Since the AMT exemptions -- in 2006, they were $42,500 for a single person and $62,550 for a married couple -- are not tied to inflation, inflationary growth in incomes will push more and more taxpayers into the AMT.
  • Before long, it could regularly affect people with annual incomes between $75,000 and $100,000.

That's a frightening prospect for Democrats, and many in Congress are wondering how to stop it.  Their most popular solution involves repealing the Bush tax cuts to pay for AMT reform.  But Democrats who rail against both the AMT and the Bush tax cuts are not being entirely coherent, says Sawicky.  If they repeal the Bush tax cuts, they raise income taxes on some of the taxpayers who would otherwise pay the AMT.  Yet Democratic budget resolutions say nothing about changing the AMT and assume revenues that result from the tax cuts expiring.

The most urgent incremental reforms are to simplify the AMT and prevent any further incursion into income levels below the six figure level, says Sawicky.  The misguided Democratic assault on the AMT is an unfortunate echo of bankrupt supply-side doctrine and anti-tax posturing.  Somebody, sometime soon, will have to make the case for revenue, lest the welfare state fall asleep and drown in the bathtub.

Source: Max B. Sawicky, "Minimal Effort," New Republic, April 13, 2007.

 

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