Heed the advice of the Tax Reform Panel

Author: Robert Stewart

Published: November 29, 2005

Recently, the President's Advisory Panel on Tax Reform submitted its final report, after nearly a year of hearings.

One of their recommendations is repeal of the Alternative Minimum Tax (AMT). For those of us who want a more fair and simple tax code, repeal of this tax is a great starting point.

The AMT traces its origins to the late 1960s, when the Treasury Secretary testified that 155 individuals who earned over $200,000 (the equivalent of $1.17 million today) didn't pay any income taxes due to the use of tax credits, exemptions and deductions. An intense letter-writing campaign followed this testimony, and led to the creation of a minimum tax. This minimum tax ultimately led to the Tax Equity and Fiscal Responsibility Act of 1982, the legislation that established the current AMT. The purpose of this legislation was to ensure that "no taxpayer with substantial economic income should be able to avoid all tax liability by using exclusions, deductions, and credits." Those subject to the AMT must add their disallowed exemptions, credits and deductions (called preferences) to their taxable income under the regular income tax structure, subtract the AMT exemption and pay taxes on the higher of either the AMT liability or the regular tax liability.

At this point, the AMT doesn't sound like such a bad idea. Well, here's the problem: next year, 19 million tax returns are projected to be affected by the AMT, and by 2010, that number will increase to nearly 30 million. Here's a second problem: most of these taxpayers are middle and upper-middle class taxpayers. Here's a third problem: the number of millionaires that still pay no income tax exceeded 100 in 2001.

The AMT's increasing reach can be attributed to its lack of inflation indexing and recent tax cuts. Scholars at the Urban Institute and Brookings Institution note that indexing the AMT for inflation would reduce the number of people paying this tax by 71 percent overall and by 92 percent among those whose adjusted gross income is between $50,000 and $75,000. Additionally, indexing for inflation and eliminating certain preferences would reduce the number of AMT filers in this income group by 98 percent. Regarding income tax policy, they show that the percentage of returns subject to the AMT in the year 2010 doubled with the passage of the 2001 income tax cuts. Andrew Chamberlain and Patrick Fleenor of the Tax Foundation add the income tax cuts of 2003 with the 2001 cuts and claim that these two policies will be responsible for most of the expansion of those with AMT liability.

The growing reach of the AMT is an example of how the current tax system cannot correct its own problems. While a few millionaires are able to avoid taxation, 30 million families will be stuck paying the tax that was intended to end that avoidance. Congress should act on the Tax Reform Panel's recommendation to end this tax.