Repealing Alternative Minimum Tax Not the Answer

The alternative minimum tax is a second, parallel tax system that runs alongside the current income tax system.

While most people are unaware of its existence, those who are caught by the AMT -- mostly upper- and upper-middle income taxpayers -- face an additional, complex set of filing rules that can lead to additional payments to the IRS.

The AMT will become an increasing political issue because if nothing is done to "fix" the system, it will begin to affect more and more, increasingly middle-class people. One projection puts the number of AMT filers at nearly 22 million in 2007 if a change is not made.

So far, Congress has been taking a one-year-at-a-time approach, which simply pushes the problem into the future without putting in place a solution. President Bush's tax changes from 2001 on have made the problem worse by changing the rate structure and by not making permanent adjustments to the AMT. Unless a change is made soon, nearly 13 million additional people would have to pay the AMT in 2007 because of Bush's post-2001 tax changes. Perhaps this is why the president has rarely mentioned the AMT and instead focuses on other tax issues.

The right policy solution, however, cannot be to simply repeal the AMT, however tempting that might sound. First, there is the issue of cost. Simply repealing the AMT would cost more than $1 trillion over the next 10 years (assuming Bush's tax changes extend past 2010). With a $250 billion annual deficit, this would simply add to the tax bill that is passed on to future generations.

Second, there is an issue of fairness. The reason the AMT was established was to ensure that people with very high incomes could not shelter all their income and would have to pay at least a minimum amount. Simply eliminating the AMT would be another trillion dollar tax cut that would primarily benefit those making more than $100,000 a year.

A more responsible approach would be to examine the reasons how so many high-income individuals can avoid income taxes. An AMT repeal should be coupled with a revamped income tax code that addresses the problem of avoidance directly rather than relying on a second layer of taxation. This may mean limiting some of the deductions, credits and tax-preferred treatment for those with high incomes. With the elimination of the AMT, other factors that cause low-

John S. Irons is the director of tax and budget policy at the Center for American Progress.

or no-tax filings will certainly arise, and we should do as much as possible to seriously limit, in advance, those preferences that lead to avoidance.

Better yet, the next Congress ought to pursue a broader tax reform agenda that would lead us to a tax code that is simple and fair, and that creates as few economic distortions as possible while still raising adequate revenue to fund national priorities. Even though Bush has shown little interest in a base-broadening tax reform, Congress should still start to prepare for the inevitable. Sooner or later, our current, unsustainable, policy will have to be changed. Better to start that debate now.

For more information on AMT and tax reform, see:

Tax Dodging: http://www.americanprogress.org/issues/2005/07/b887227.html

A Fair and Simple Tax System for our Future: http://www.americanprogress.org/issues/2005/01/b310260.html

John S. Irons is the director of tax and budget policy at the Center for American Progress.

null
Join the Discussion
You are using an outdated version of Internet Explorer. Please click here to upgrade your browser in order to comment.
blog comments powered by Disqus
 
You Might Also Like...