The Alternative Minimum Tax Mess
Hidden among the thorny branches of the fiscal cliff is the alternative minimum tax (AMT).
It could hit the pocketbooks of 30 million American families come January 1st. Only 4 million paid this odious tax in 2011.
The alternative minimum tax is yet another example of well intentioned government run amok. It is the product of good intentions, bad design and Congress’s penchant for money and power.
The AMT alone is fully $119 billion of the nearly $500 billion in tax increases scheduled to take effect in 9 days. It, of course, hits the middle class smack dab in the breadbasket.
Couples making as little as $45,000/yr and individuals as little as $33,750/yr could be affected; that according to a December 20th, 2012 Wall Street Journal story titled, “Millions Face a Hit if Fix for Minimum Tax Fails to Pass“.
What is the Alternative Minimum Tax?
This tax is the 1969 version of making the rich “pay their fair share”.
It was created under President Nixon in reaction to then Treasury Secretary Joseph Barr’s announcement that 155 high-income households had not paid a dime in federal income taxes.
In its infinite wisdom, the Congress decided that was not fair. The wealthy were taking advantage of to many tax loopholes. Instead of logically closing the loopholes, Congress deviously enacted the AMT limiting the amount in loophole deductions the rich could take.
Now, every year when filling out IRS forms, a taxpayer must chose between the HIGHER of two different tax calculations:
- The regular graduated tax rates we are all familiar with
- The AMT.
The AMT tax calculation is based on minimum income. That is where the “minimum” part comes from. If you make more than the minimum then you are subject to the AMT. If you don’t then you aren’t.
The Problem with the Alternative Minimum Tax
The minimum income subject to the AMT is a hard-wired number. It is not tied to inflation or the CPI or to any other reasonable automatic adjustment that would keep it targeted only to the wealthy. Since people’s incomes increase over time more and more taxpayers become subject to the AMT calculation each year.
The Congress, therefore, must pass legislation every year to raise the AMT minimum in order to prevent that from happening. It was designed that way for a very specific purpose. By making that decision each year it allows Congress one of those tricky ways it has to raise taxes without anyone really knowing it.
Here is how it works. The Congress decides how much increase in tax revenues it wants from the AMT that year, then adjusts the AMT minimum salary to raise that amount. Of course, it means more people pay the AMT, but so far a blindly trusting public hasn’t caught on.
Thus, Congress can slyly raise more revenues to satisfy its voracious appetite for spending.
The AMT and the Fiscal Cliff
The jig is up. The fiscal cliff debacle has exposed the alternative minimum tax for what it has become… a hidden annual tax increase for some surprised taxpayers.
Unfortunately, the Congress outfoxed itself. Unwanted by Congress, millions of registered middle class voters may become exposed to it in a few days.
Much like President Obama wants to do now, the AMT was a well intentioned 1969 law passed to make the rich “pay their fair share”.
But, as always, the Congress got greedy. The AMT was specifically designed such that Congress had a hidden way to increase taxes without the general public catching on.
Over the years, Congress slowly increased the targeted population size in order to raise more revenues and fund more spending. It was up to 4 million taxpayers by 2011 and could be 30 million next year.
This year the ruse is exposed as a huge potential $119 billion tax bite affecting individuals making as little as $33,750/yr.
This could easily be fixed. Just tie the minimum salary to inflation and the problem is solved. But that would take away some of government’s hidden taxing power.
Don’t expect any change. Instead, expect the President and Congress to pretend to swoop in riding on white horses to once again save the middle class from an odious AMT increase. Then, behind the scenes, it remains business as usual.