NCPA - National Center for Policy Analysis

Reforming the Alternative Minimum Tax

July 15, 2003

Millions of middle-class taxpayers are being affected by a "class tax" that was never intended for them, say the authors of a new study in the Journal of Economic Perspectives.

The alternative minimum tax (AMT) is a parallel tax system alongside the regular income tax. It was established in 1969, when legislators discovered that 155 wealthy citizens weren't paying any income taxes at all, thanks to all the deductions Congress authorized.

Originally geared towards high-income individuals, the AMT was never indexed for inflation and is now affecting millions of middle-class taxpayers. According to the authors:

  • Projections show that the number of AMT taxpayers will jump from one million in 1999 to 36 million in 2010.
  • By 2010, 79 percent of tax filers with incomes between $75,000 and $100,000 will pay the AMT.
  • Half of all income will be taxed under the AMT by 2010, and repealing the regular income tax would reduce tax revenues less than eliminating the AMT.
  • Indexing the AMT for inflation would reduce the number of AMT taxpayers in 2010 by 71 percent overall and 92 percent for middle-income filers.
  • Allowing dependent personal exemptions and tax credits for child care and education would eliminate 98 percent of middle class taxpayers from the AMT rolls.
  • Allowing deductions for state and local taxes and miscellaneous expenses would end the AMT for all but the richest tax filers.

The AMT is doing almost nothing to fulfill its original purpose: making sure the richest citizens pay income taxes. Although millions are subject to the AMT, the system only prevented about 600 filers with incomes above $1 million from paying no income tax, the authors explain.

Source: Leonard E. Burman, William G. Gale and Jeffrey Rohaly, "The Expanding Reach of the Individual Alternative Minimum Tax," Journal of Economic Perspectives, Spring 2003.

 

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