AMT Patch: Lessons Yet Learned
December 04, 2007
In order to keep a sizeable number of middle-income families from being hit with an average $2,000 tax increase via the alternative minimum tax (AMT), Congress is focused on passing legislation that would effectively nullify the tax for at least one year.
The cost of this nullification is substantial: an average of $5 billion per year.
This money will most likely not be offset by new taxes and will count as a shortfall to the budget. While it is good fiscal sense to mandate revenue increases (that’s politico for “taxes”) when providing what is essentially a tax cut, this case is very different, and a prime example of how sloppy government affects all of us.
The AMT was initially designed to close tax loopholes and prevent a handful (155) of mega-rich families from paying little or no income taxes through creative deductions. This ensured, at the time, that these few families paid at least a portion of what the government felt they should. Much like social security’s age requirement however, the AMT was never changed to meet today’s conditions.
Instead of being indexed to ensure that only the mega-rich continued to be taxed, the AMT was left unchanged and every year more and more families have been saddled with this tax.
In response to this predicted shortfall from the AMT patch, the House passed legislation that would increase taxes amongst Wall Street firms, however its passage in the Senate is unlikely. While most would not feel bad about the super-wealthy being taxed a little more and middle-class families a little less, the revenue lost from the proposed patch is revenue that should never have been materiel in the first place.
This is the crux of the problem: poor government policy has kept the AMT at 1969 levels for almost 40 years. Congress, over the years, has continually failed to address this condition much as it has failed to address the social security shortfalls that are predicted in the coming decades. The revenue gained from the AMT should not have grown at the rate which it did had the AMT been indexed for inflation and the expected increase in a family’s income over time. This has been money ill-gained, for the most part, and the policy should either be adjusted to meet today’s standards or eliminated entirely without penalty to any group, no matter how wealthy they may be.*UPDATE*
Legislation passed the Senate providing a one-year patch for the AMT without providing a means to cover the "lost revenue". The problem is not solved yet as there is talk in the House that some members want to offset the loss with revenue from increased taxes elsewhere. The idea of taxing Wall Street financiers at a higher level for portions of their income (at the regular rate for income instead of half that, which is the capital gains rate) is still being discussed as well as taxing off-shore accounts that are designed to elude U.S. taxes.