What’s the alternative to the AMT?

Bob Moon Mar 21, 2007

KAI RYSSDAL: The search is on for some kind of alternative to the alternative minimum tax. Actually, policy wonks have been thinking about the AMT for years. They’ve just never been able to figure out what to do about it.

Lawmakers meet on Capitol Hill tomorrow to hear from taxpayers who’ve been hit by the AMT. And getting rid of it is on the Democratic Party’s wish list. But Marketplace’s Bob Moon reports the Federal Treasury just can’t afford that.

BOB MOON: This story began almost four decades ago. There was something of a tax revolt sweeping the country — as evidenced by this song from back then by the band Bread.

BREAD: Bet by now, I’ve paid a-hundred thou / But I ain’t saved a dime / The IRS came out best / They got my money every time.

Ohio State Professor William Raabe explains that Congress was outraged over a small number of wealthy Americans who were able to avoid their fair share.

WILLIAM RAABE: They ended up paying very little, or zero tax . . .

BREAD: Can’t be fair when the millionaire / Never has to give ’em a cent . . .

RAABE: . . . which didn’t look good in the newspapers . . .

BREAD: Sad to say, we’ve lost our way / This isn’t what the govern-meant . . .

RAABE: So rather than change the underlying tax law, they put this tax on loopholes on top of it. And at the time, there were only a few hundred thousand people who were paying it. Now, the AMT is up to about 2 or 3 million taxpayers, and it’s falling on people who it wasn’t supposed to fall on.

The alternative minimum tax throws out many standard deductions and is now hitting more and more middle-income Americans as inflation — and incomes — grow. The reason may be simple, but fixing it isn’t.

RAABE: It may be too expensive to change at this point. Depending on which projection you see three, four, five years from now, the AMT will be generating more revenue than the regular tax will.

Raabe says so much tax revenue is at stake, Congress has been wrestling for years over who should be exempt.

RAABE: Which taxpayers to remove from the AMT and how to do it?

Yale University tax law expert Michael Graetz says so far, lawmakers have been avoiding the issue.

MICHAEL GRAETZ: The AMT is a very big gorilla. It’s over a trillion dollars. And nobody in Congress is going to tell you where they’re going to pay for eliminating the AMT, because they don’t want to identify the people who are going to be subject to the tax increase. And very few members of Congress are willing to say, “We can forego another trillion dollars of revenue without making it up somewhere.”

Some wonder if Congress will ever be willing to give up the flow of money from the AMT.

Len Burman is director of the Tax Policy Center, a D.C. research group.

LEN BURMAN: I think Congress likes AMT the way an addict likes crack.

Lawmakers have been tinkering with temporary patches. They’ve jacked up exemption levels year by year to prevent tens of millions of taxpayers from having to pay thousands more than they might be expecting.

But as the number of taxpayers caught by the AMT grows, the chorus is beginning to sound like that tax revolt of four decades ago . . .

BREAD: Somewhere back, we jumped the track / This isn’t what the govern-meant . . .

BURMAN: If they don’t extend this temporary patch, there are going to be 20 million more people subject to the AMT next year. The problem with this kick-the-can approach is that every year, it gets more expensive.

Burman says lawmakers need to quit tinkering. Ohio State Professor William Raabe agrees. He suggests that so much revenue is now at stake, the AMT itself might be the answer.

RAABE: Let’s take the AMT as our basic tax structure, and just go with this flatter rate, very productive in a revenue sense, tax system and throw out the old one. And that is, not have two tax systems but just have one. And say, “All right, this trial balloon called the AMT has been successful, and we’re going to adopt that.”

But the Tax Policy Center’s Len Burman thinks adopting the AMT in its present form is an awful idea.

BURMAN: It’s not adjusted for inflation, so there’s this nasty bracket-creep phenomenon. Every year, your tax bill would go up even if your income wasn’t changing at all. And its got horrible marriage penalties in it. Married couples are something like five times as likely to owe AMT as single people. It penalizes families with children. It would be a terrible base for a tax system.

With recent tax cuts set to expire at the end of the decade, Yale professor Michael Graetz says the clock is ticking on finding comprehensive reform by then.

GRAETZ: It may include some of the provisions that are now in the AMT and some of the provisions that are the regular tax and be a mix of both. But yes, I think 2009, 2010 is when we can expect Congress to really come to grips with this.

Meantime, the Tax Policy Center’s Len Burman says millions of Americans can only hope another patch will shield them from a painful shock on their tax bill.

BURMAN: You might bet that Congress will fix it on a temporary basis, but people shouldn’t have to be subject to that kind of uncertainty. They shouldn’t have to gamble on what Congress will decide to do, to know how the tax system is going to affect them.

BREAD: I got burned, but I finally learned / This is what the govern-meant.

I’m Bob Moon for Marketplace.

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