Class Warfare Gone Awry

The Alternative Minimum Tax Has Grown Out of Control

Author: Eric V. Schlecht

Published: October 8, 2002

A soon-to-be released study by the National Taxpayers Union, and a recently released study by the Brookings Institution and the Urban Institute, both confirm what conservatives have been saying for years: The alternative minimum tax (AMT) - originally conceived of in 1969 and meant to prevent the "rich" from legally lowering their tax liability - has grown out of control and will soon affect a majority of middle-class taxpayers. (In a bit of political irony sure to amuse those on the Left, the Bush tax cut will actually exacerbate this problem, though unintentionally.)

The consequences for taxpayers, the economy, future tax reform, and the political fortunes of Republicans are dire.

Complex even by IRS standards, the AMT requires taxpayers whom the government believes have "too little" taxable income to calculate an alternative tax liability under a different set of rules. If it is determined the taxpayer has a greater tax liability under the AMT, he must pay that amount. Because Congress did not adjust the AMT for inflation, it has increasingly applied to more and more taxpayers - far beyond the few "Big Rich" it was intended to snare.

As the study by the moderate-to-liberal Brookings Institution and Urban Institute ominously notes, by the end of this decade fully 85% of taxpayers with two or more children will be forced into the AMT system. The study further finds that an alarming 97% of families with two children and an income between $75,000 and $100,000 would have to contend with the AMT system. "This is a cop married to a nurse," study author and Brookings fellow William Gale noted. Hardly Thurston Howell III by any stretch of the imagination.

In addition to the billions in new taxes that will be paid by taxpayers under the AMT, they will be forced to pay billions more in compliance costs. According to calculations cited in NTU's upcoming study, "The Alternative Minimum Tax: Maximum Pain for Taxpayers," the AMT imposes at least $1.5 billion in annual compliance costs - roughly 30% of what it actually raises in revenues. Obviously these costs will skyrocket as more and more taxpayers are required to comply with the AMT.

While this is clearly very bad news for taxpayers, it also represents a massive blow to the economy. While the AMT may make class-warfare purists feel good, it is an extremely inefficient tax that is highly detrimental to America's economy. The NTU study notes that, "the AMT deprives the economy of resources that productive individuals and companies would otherwise put into developing new goods, services, jobs, and other beneficial activities." Inefficient, highly complex, and a drag on the economy - no wonder Washington loves the AMT.

Perhaps most troubling about the AMT is that with every year it survives, it afflicts more and more taxpayers and therefore generates more and more revenue. You don't have to be a tax lobbyist to realize that the more revenues a tax brings into Washington, the harder it is to kill. Thus, in addition to all the drawbacks listed above, the AMT also represents a significant impediment to the hopes of tax reform.

The AMT is a prime example of an unfair, unwarranted, complex, and economically detrimental tax that must be eliminated. Almost everyone who isn't an accountant or tax lawyer agrees that some form of tax reform is urgently needed. Yet each day we allow the AMT to survive and expand, our ability to achieve that reform decreases. The sooner the AMT is reformed - or better yet, repealed - the better our chances for real tax reform.

Finally, if left as is, the AMT could represent a significant political detriment to Republicans. Its ramifications to tax reform could significantly hinder President Bush's stated objective to reform the tax code under his watch - quashing a major legislative and political victory. Furthermore, a significant tax increase on the middle class while the Republicans are on watch will hardly endear the GOP to this key voting bloc. Finally, as a sluggish economy continues to dampen Republican electoral chances, the last thing they need is to add the albatross of an expanded AMT around the economy's neck.

A hall of fame example of the law of unintended consequences, the AMT is quickly becoming Congresses's Frankenstein monster. If members of Congress don't do something about this mess soon, they shall surely suffer the consequences - and have no one to blame but themselves.