The Entrepreneurial View #461                                                                        

Put an End to AMT Woes

by Raymond J. Keating

As Congress dithers, more than 20 million taxpayers are left wondering if they are going to get hit by the alternative minimum tax (AMT) this year.  For good measure, many tax refunds could be delayed.

Over the last few years, Congress has passed an "AMT patch" that limits the reach and damage of this parallel income tax system.  Many taxpayers have to do their taxes according to both the normal personal income tax and the AMT, and then pay the higher of the two tax bills.

About four million taxpayers were captured by the AMT in 2006.  If Congress does not at least pass a similar patch for 2007, then 23 million to 25 million taxpayers would be ensnared by the AMT.  By the end of the decade, the number would reach 35 million.  According to a December 2 Wall Street Journal report, the AMT would add anywhere from $2,000 to $4,900 on average to a taxpayer's bill.

Meanwhile, the IRS Oversight Board has noted, according to a December 2 Associated Press report, that if Congress does not pass an AMT patch by the middle of the month, then the tax filing season might have to be delayed.  The IRS is holding off on printing assorted tax forms while waiting on action from Congress.  The story noted: "The IRS oversight board, using past agency data, said that if the start of the filing season is pushed back two weeks to Jan. 28, it would delay some 6.7 million refunds totaling $17 billion. A Feb. 18 starting date would delay 37.7 million refunds totaling $87 billion."

Let's keep in mind, that past Congresses and Presidents have put us in the current bind.  For example, the individual AMT was first imposed in 1969 because 155 wealthy taxpayers avoided paying income taxes in 1966 through the use of legal tax measures. Now it threatens tens of millions of taxpayers.

The tax rate also has jumped.  It was originally 10 percent, and now is 28 percent.

And along the way, the income thresholds for the AMT were never adjusted for inflation, which explains why the AMT guillotine threatens to fall on the necks of some 25 million taxpayers this year.

Most distressing was the great opportunity lost in 1999.  Congress had passed a tax bill that included the complete elimination of the AMT at the end of this year (by the way, it also would have eliminated the estate tax in 2009, and indexed capital gains for inflation).  But President Bill Clinton vetoed the measure.  If President Clinton had signed that bill, the individual AMT would be gone next year. No more AMT worries.

Unfortunately, though, with Clinton's veto, now we continue to have to wrestle with this ugly and costly tax.

Congress needs to change direction. It should immediately pass a patch for 2007.  And it should do so without other tax increases.  For example, among the assorted tax hikes in the House AMT patch bill was a dramatic increase in the tax rate on carried interest paid by investment fund managers.

And then Congress should undo the damage done by President Clinton by passing a bill to eliminate the AMT.

Some inevitably will say: How to pay for this? Well, the money that would be extracted from taxpayers via the AMT in the future is not the federal government's money.  It is the taxpayers' money. The AMT was never meant to sock millions of taxpayers. Like so many other taxes and government programs, it has careened out of control.  The answer is to eliminate this monstrosity, and if our elected officials are suddenly and truly concerned about future budget deficits, the answer is not to raise other taxes.  Instead, it is quite simple - restrain spending growth.

On November 10, The Washington Post reported: "Rep. Jim McCrery (La.), the ranking Republican on the House Ways and Means Committee, reasoned that Congress is simply trying to keep the taxes of 23 million families from going up. Since that is not really a tax cut, he said, its $52 billion cost to the Treasury should not be paid for. Besides, he said, the AMT was never meant to hit the middle class. ‘Why don't we just admit the mistake and get rid of it?' he demanded."  McCrery, of course, was quite right.

Unlike President Clinton, I'm quite confident that President Bush would sign a straightforward bill that simply eliminates the AMT.

_______

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

This article may be reprinted with appropriate citation and credit.