Its origins lie in the discovery in 1969 that 155 of the wealthiest Americans had succeeded in avoiding paying any taxes. Congress enacted the Tax Reform Act of 1969, part of which instituted an add-on tax targeted at making the wealthy pay … something. Congress then changed its mind with the Tax Equity and Fiscal Responsibility Act of 1982, which changed the AMT to its current state as a parallel tax system.
And it's not a very simple system. Some things (such as state and local taxes) no longer qualify as deductions, and some other things which weren’t taxed as income now are (e.g.,interest from revenue bonds (like a state or municipal bond to build an airport, and whose payments come from the income it generates) – but not general obligation bonds (a state or municipal bond paid back out of taxes). Certain caps are raised, some depreciations take longer ... it's a mess.
And that’s the first problem with the tax. If your income is above a certain relatively modest level (currently, $74,500 for a household), you have to calculate your taxes twice, and that's a pain.
The second problem is that Congress failed to index the AMT to inflation. So an idea which was originally targeted at the wealthiest couple of hundred Americans ends up hitting more and more of the middle class. (Congress will, from time to time, apply "patches" to the AMT to correct for this, but it hasn't come up with a permanent solution.)
Finally, the third problem with the AMT is that is has grown quite a bit in terms of how much personal income tax it generates. While it only produced about $122 million in 1970 (about $671 million in 2009 dollars), it now produces about $39 billion. For the sake of comparison, the AMT was responsible for a minuscule 0.15% of the $86 billion raised in 1971, and was responsible for about 4% of the $900 billion raised last year -- or about 25 times as much.
|Did you notice that the green slice is almost as big as the blue slice? The green slice is what Republicans would like you to forget about when they say that 47% of Americans don't pay federal taxes. In fact, the green slice represents a flat tax of 13.3% (4.2% Social Security tax on employees, 6.2% Social Security tax on employers, and 2.9% Medicaid tax split evenly between employees and employers) which is capped at $106,800 of earned income. Every dollar of earned income above $106,800 -- and every single dollar from capital gains -- is excluded from this tax. And it's still as big as all the revenue generated from personal income taxes.|
Unfortuntely, there doesn’t seem to be a quick fix to this problem – or at least one we can see. So let’s prioritize and see what we can get done relatively quickly.
The biggest problem with the AMT is that its scope has grown to be far more expansive than what was originally intended – all due to the failure to automatically adjust the AMT for inflation. So let's get that out of the way first. Whatever we end up doing, we'll allow for inflation so that we don't have to re-visit this issue every few years.
The second biggest problem is that it hits too much of the middle class. With the AMT trigger set at $74,500, roughly a third of American households would at least have to prepare their taxes twice. If, however, you set the trigger at the oft-discussed $250,000 level, you'd only affect about 2 - 3%.
And at that income level, the chances that a professional tax-preparer is involved is pretty good -- meaning that even these households wouldn't be inconvenienced by doing their taxes twice!
Setting the AMT at $250,000 may be the best idea at the moment. It maintains the AMT for those Americans who are earning the most, while allowing the vast, vast majority of Americans to go their merry ways. It should continue to generate some revenue, though certainly not as much as in the past. Fortunately, however, the changes we're making to the tax code -- namely, taxing capital gains as earned income -- should more than make up for that.