An AMT Primer: Congress Passes Another Flat Tire

By November 8, 2007Taxation

As Congress gears up to wrap up its legislative session, there’s a lot of talk about repealing or patching the Alternative Minimum Tax (AMT). It’s one of the biggest battles going on in Congress – but most Americans don’t know what the AMT is. Here’s a quick and dirty rundown on the tax:

In 1969, the Treasury Department revealed that more than 150 individual taxpayers with incomes above $200,000 did not pay any income tax. So, an outraged Congress did exactly what we would expect them to do. They created a parallel tax system. You know, it’s kind of like a parallel universe, except more expensive. The idea was that rich people shouldn’t be able to use so many deductions and exemptions that they would avoid paying taxes. So, in the new parallel universe, rich people would figure their taxes once – then if they weren’t paying enough tax – they would have to figure them a second time – using a whole new system. If under the new system, they owed more – then they would pay the difference between the two.

But, Congress made two huge errors. One was thinking that this was a good idea in the first place. The second was not indexing the AMT rates to inflation. Over time, salaries increased and what seemed “rich” in 1969 was no longer “rich” in 1993. But, that didn’t stop Congress or President Clinton from raising the AMT rates again – causing the tax to dip further into middle class taxpayers.

There was a confluence of events that brought us to our present-day disaster…

There was a confluence of events that brought us to our present day disaster. In addition to the above mistakes, there is the problem with Congressional budgeting. See when Congress makes a mistake (like not indexing the AMT to inflation), they still continue to budget the money that results from the mistake. It would be like you figuring your budget assuming 20 percent raises from your boss each year but then not changing your budget when they don’t pan out.

The second thing that has happened is that instead of just fixing the mistake by indexing the tax to inflation or just repealing it outright, they have “patched” the tax each year to keep it from reaching too far down into the middle class. But, just like a flat tire, it’s not smart to just keep patching it. So, now there are 23 million taxpayers in the flat tire that Congress is trying to patch. Twenty-three million Americans who have never paid the tax and don’t know what it is.

There is a public relations disaster for both sides. Democrats want to raise taxes to pay for Congress’s mistake. They’re trying to tell people that technically it’s a tax cut because now they won’t have to pay the tax that they never paid. Got that? Republicans want to repeal the tax without paying for it – but under Congressional budgeting rules – that translates to a roughly $1 trillion tax cut for – you guessed it – the rich.

So, what to do? Well, Congress is placing their bets that this tire is good for another year.

[On November 1, Ways & Means voted out H.R. 3996, the Temporary Tax Relief Act of 2007, with AMT provisions, by a vote of 22-13. News release here.]

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