Defending the Alternative Minimum Tax.

Policy made plain.
Oct. 20 2007 7:05 AM

A Viable Alternative

Defending the tax the GOP wants to kill.

(Continued from Page 1)

In the six years ending last January, when they controlled both Congress and the White House, Republicans could have made government as lean as they wished, and no one could have stopped them. They didn't. It used to be that when they proposed irresponsible or fantasmagoric tax cuts, Republicans at least went through the motions of coming up with some theory about how it would all be paid for.

Supply-side economics—tax cuts would pay for themselves by generating new economic activity—often played this role. It made no sense, but it honored the tradition that you at least give the voters the material they need to fool themselves. It was the tribute that demagoguery pays to mathematics. Now, they don't even bother.

The problem with present arrangements isn't the AMT. It's Bush's tax cut for the affluent. For example, Citizens for Tax Justice (a left-wing group, but one whose analyses are rarely challenged by neutral experts) figures that the most startling element of that tax cut—the reduction of tax rates on both dividends and capital gains to a maximum of 15 percent—reduced tax revenues by $91 billion in one year (2005). Three-quarters of that benefit went to taxpayers—the top 0.6 percent—who reported incomes of more than $500,000. The AMT prevents the federal deficit from being even higher than it is. And although it no longer strikes only the very tippy-top incomes, it still is fairly progressive: Even in 2010, when the AMT will hit 20 percent of taxpayers if it isn't changed, more than half of AMT revenue will come from taxpayers reporting incomes higher than $200,000.

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Actually, if you were designing the tax system from scratch, you might come up with something that looks a lot like the AMT. It resembles the "flat tax" of many reformers' dreams: a high basic exemption, so that low-income people don't pay it at all; very few deductions, credits, or exclusions; and (because of that) a much lower top rate than the current system: 26 percent compared with almost 40 percent. What makes it complicated is having to figure your taxes twice to see if it applies to you. Of the two parallel tax systems we now have—the regular income tax and the Altermantive Minimum Tax—it might make more sense to scrap the regular one and keep the AMT.

The tax code goes through generational cycles. The last big reform was 1986, when loopholes, deductions, and credits were eliminated and rates were cut dramatically. People remember this as a triumph of Ronald Reagan. But in fact, that reform emerged out of popular anger at the discovery that Reagan's earlier tax cuts had allowed many rich individuals and corporations to pay little or no tax. That is exactly the same anger that led to the creation of the AMT in 1969. And again today, many people, especially Republicans, say they want a simpler tax system with low rates and no loopholes. But one person's loophole is another person's important social policy—or, in fact, the same person's important social policy. As soon as we get that simpler system, people will start cluttering it up again: lower rates for capital gains, to encourage investment; the charitable deduction, to encourage private philanthropy; a bigger exemption for dependents, to encourage "family values" (you got a problem with this, buddy?). But all that's OK—in 20 years we can sweep out the clutter and start all over again.

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