Ask Money

The AMT

Chris Farrell Dec 20, 2007

Question: Hi folks, We were just sitting here listening to Chris Farrell say that the AMT should be eliminated. We agree that changes need to be made to this tax, but don’t understand why it should be totally eliminated. The problem it was originally designed to solve probably still exists. Chris said the reason the situation is bad now is because it was not indexed to inflation. So why not just make the change so that the income levels affected are in line with those originally targeted? Obviously, there would still need to be another source of revenue for the government. But why do away with it completely? Paul and Carol, Joelton, Tennessee

Answer: It’s a good question. Now, I’m in the camp that believes the AMT or Alternative Minimum Tax came about for a good reason: Evidence in the late 1960s that some of the nation’s wealthiest families weren’t paying any tax thanks to shelters and deductions. I don’t think it was good tax policy or public policy that these wealthy families escaped Uncle Sam’s tax bill. And I certainly don’t like it that once again Congress and the White House have just agreed on another “patch” to limit the reach of the AMT into the middle class rather than get rid of it through fundamental tax reform.

Anyway, why not just restore the AMT to its original purpose? The reason is that I am increasingly skeptical of targeted income taxes. The current tax system is an abomination. The federal income tax code is a legal maze riddled with exemptions, exclusions, deductions, credits, phase-ins and phase-outs–as well as the AMT. Taken altogether, billions of dollars are spent on accountants and lawyers every year. Billions of hours are spent struggling to fill out forms. Tax economist Joel Slemrod at the University of Michigan has estimated that it costs taxpayers some $100 billion a year to complete their returns. That’s no chump change, even in a $14 trillion economy.

Instead of redesigning or overhauling the AMT, I favor radical tax simplification. The basic idea is simple: Lower marginal tax rates by broadening the tax base by limiting exemptions, deductions, and credits. For instance, economists have designed an income tax system that eliminates every loophole except for charitable giving and a home mortgage credit (as opposed to the current home mortgage deduction).

A White House appointed blue chip panel proposed a radically streamlined tax system several years ago; sadly, not enough attention was paid to its recommendation. A simpler, progressive tax code with lower rates would benefit all taxpayers and also ensure that the nation’s wealthiest families pay taxes.

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