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.

Sen. Chuck Grassley (R-IA). Click image to expand.
Sens. Max Baucus (left) and Chuck Grassley (right)

The Alternative Minimum Tax. It sounds horrible, doesn't it? And it gets very bad press. It was invented in 1969 as a way for the government to collect at least something from affluent people who had been a bit too successful at taking deductions and credits on the basic Form 1040. The AMT operates like an extra fence around a maximum-security prison. If they don't get you the first time, they'll get you the second.

Conceptually, this is all wrong. Tax deductions aren't (or aren't supposed to be) goodies distributed like candy on Halloween. Each one should have its own justification. And you are entitled to each one you qualify for. Giving the kids too much candy and then trying to take some of it back is a good way to become unpopular in the neighborhood. The AMT is getting more unpopular every year, as more and more taxpayers fail to make it over that second fence. The group that was fewer than 1 percent of taxpayers in 2000 will be 20 percent in 2010 unless something is done.

Having to calculate your taxes twice is annoying, too, although the Congressional Budget Office observed a few years ago that for most folks:

[T]he process is fairly simple. If they elect not to itemize their deductions, they just subtract the AMT exclusion—$58,000 for married taxpayers filing jointly and $40,250 for most other taxpayers in 2003 and 2004—from adjusted gross income (AGI) and apply the two-step tax rates of 26 percent on the first $175,000 and 28 percent on any excess. If that amount exceeds their pre-credit regular tax liability, they owe the excess as AMT.

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What could be easier? For others, the CBO acknowledges, "the process is more complicated."

More people are getting caught in the AMT trap for two reasons. One is that inflation is pushing middle-class people into territory associated with the rich. The other is that George W. Bush's first-term tax cut lowered the regular income tax for affluent people so dramatically that many more people qualify for exactly what the AMT is supposed to do—make sure that nobody with a high income gets away with paying little or no income tax. Bush's tax cut was, in this sense, a fraud. He let people escape past the first fence, knowing that many would be caught by the second one. All the budgets of his presidency have assumed—and spent—the money raised by the AMT, even as he and every other Republican have inveighed against it.

In the Oct. 11 Wall Street Journal, Sen. Charles Grassley, R-Iowa, urged repeal of the AMT and expressed great frustration, contempt, and downright bewilderment about the so-called "pay as you go" or "paygo" rules of the Democratic Congress. Under these rules, you can't introduce a tax cut without saying where you propose to get the money to cover it. Can you imagine anything sillier? Grassley cannot. With an inflamed sense of indignation but a firm grasp of arithmetic, Grassley noted that if you try to eliminate the AMT under this rule, as the Democrats are trying to do, "vast numbers of people would see their taxes go up." That is absolutely true. Every dollar someone's taxes are lowered is a dollar that someone else's must be raised. Unless, of course, you forget about those ridiculous Democratic "paygo" rules—"a simple procedural step," as Grassley says blithely.

And what about the $840 billion that the AMT is supposed to bring in over the next 10 years? Grassley doesn't say what he would do about that. More to the point, Republicans urging repeal of the AMT without a compensating increase in top brackets of the regular income tax (the Democratic solution) never have said where they'll get the money. Oh well, said Robert Novak in his WashingtonPost column the same day as Grassley's piece in the Journal, if we kill the AMT, "[g]overnment would have to get leaner." Next problem?

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