Alternative Minimum Tax: Reform, not Repeal

Government agencies of all sorts, from FEMA to the FBI at the federal level, to state and local agencies are lambasted for ponderous bureaucracy and “red tape”.  Incompetence and inefficiency in government is felt so acutely because its consequences can be so horrible.  While certainly not incompetent, no other government agency seems to be as universally loathed as the Internal Revenue Service (IRS), and no tax policy seems to be as complicated, costly, and unnecessary as the Alternative Minimum Tax (AMT).

    Introduced to the American people by virtue of the Tax Reform Act of 1969, the AMT was designed to close loopholes that allowed some high-worth households to avoid paying income taxes altogether.  There are plenty of problems with the AMT.  In the words of the Brookings Institute, it is “notoriously and pointlessly complex”.  Not only is it a hardship for taxpayers, the Internal Revenue Service has identified the AMT as one of the most difficult programs to administer.  It is, in the words of Leonard Burman, Director of the Tax Policy Center,  “the 800-pound gorilla in the room”.  Not only is the tax itself difficult and intractable, but so too is its resolution.  As we will see, there is little satisfaction with the tax as it is, yet, as we will also see, the most obvious solution, namely getting rid of it, is an equally offensive option.

    The AMT is also not indexed to inflation, meaning more households will be subjected to it, including upper-middle class households that were not part of the tax’s scope when it was created.  The Alternative Minimum Tax is unpopular, and deservedly so, and this unpopularity has led to calls for its repeal.  Organizations such as the Cato Institute and the Tax Foundation have been arguing for a repeal of the AMT.  A complete repeal of this cumbersome and difficult tax is certainly tempting, but it is not the best course of action for a nation that is literally hemorrhaging money. 

    First and foremost, a repeal of the AMT would result in a substantial loss of tax revenue.  The Center on Budgetary and Policy Priorities estimates that we would lose from $800 billion to $1.5 trillion in federal revenues over a 10 year period.  With the presence of other generous tax cuts, exorbitant military spending, and lavish “rescue” plans for financial institutions, the loss of this revenue could be catastrophic.  What’s more, a repeal of the AMT would be singularly regressive.

    The Brookings Institute estimates that more than 75% of the benefits of repeal would go to households with income above $100,000.  This nation is reluctant enough to provide government assistance to households with abysmally low incomes.  We should be equally cautious of an attitude of excessive indulgence for our most prosperous taxpayers.  It would be idiotic for us to relinquish our claim to the resources of our wealthiest in these increasingly dire economic times.  It would be despicable if we were to benefit our most fortunate while enjoining those in poverty to accept responsibility for “mistakes,” for which they are not entirely responsible.  It is clear that the AMT as it stands is unsatisfactory; a complete repeal of the tax would lead to equally unsatisfactory consequences.  The best option would be to reform the AMT to minimize its substantial flaws without foregoing at least some of the appreciable tax revenue it generates.

    The most important step in reforming the AMT is to spare middle class taxpayers.  High net worth households have the resources to withstand this bleak economic period.  The middle class will be hard-pressed enough without having to worry about the AMT.  Simply indexing the AMT for inflation would eliminate the “bracket creep” of inflation pushing households into higher tax brackets for the purposes of this tax.  The AMT can also be reformed to authorize personal credits and dependent exemption deductions.  The Brookings Institute estimates that these reforms would reduce the number of AMT taxpayers in 2010 by 88%.

    The AMT demonstrates how a solution to a problem yesterday can be the source of new problems today.  This is a lesson we must keep in mind when we address this unpopular tax.  Repeal will lead to critical revenue losses, which in turn may lead to draconian tax increases in the future, while reform can protect the middle class without completely sacrificing the valuable tax revenues we will need for an uncertain future.

Tagged with: Households • Incompetence • Pound Gorilla

Filed under: Health

Like this post? Subscribe to my RSS feed and get loads more!