Saturday, October 20, 2007

Viva AMT?!

One of the more prominent tax policy issues these days is the Alternative Minimum Tax (AMT). The AMT was enacted in 1969 as a way of ensuring that high-income earners would indeed owe some income taxes, even if, under the regular system, they could find enough loopholes, deductions and credits to reduce their obligations to zero. The AMT is an alternate, simpler, income tax - high income taxpayers are supposed to calculate their taxes under the regular system and under the AMT and pay whichever is greater.

The AMT has become a big issue because the number of taxpayers affected by it is expected to grow significantly. This reflects two things: (i) the thresholds for the AMT are not adjusted for inflation, so as nominal incomes rise with inflation, an increasing number of upper-middle-class taxpayers will be affected and (ii) the tax cuts of 2001 and 2003 have reduced the regular tax liabilities for many, especially high-income earners.

In the Washington Post, Michael Kinsley defends the AMT. He writes:
If you were designing the tax system from scratch, you might come up with something that looks a lot like the AMT. It resembles the "flat tax" of many reformers' dreams: a high basic exemption, so that low-income people don't pay it at all; very few deductions, credits or exclusions; and (because of that) a much lower top rate than the current system: 26 percent, compared with almost 40 percent in effect today. What makes it complicated is having to figure your taxes twice to see if the AMT applies to you. Of the two parallel tax systems we have -- the regular income tax and the alternative minimum tax -- it might make more sense to scrap the regular one and keep the AMT.
The Urban/Brookings Tax Policy Center has background on the issue.

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