Still one thing more, fellow citizens — a wise and frugal government, which shall restrain men from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government, and this is necessary to close the circle of our felicities.
—Thomas Jefferson (1743-1826)
Third President of the United States
First Inaugural Address, March 4, 1801
I wonder if Thomas Jefferson would consider the collection of $95 billion dollars from American taxpayers in 2010 in the form of a 26 percent regressive tax wise or frugal? If the Alternative Minimum Tax (AMT) is left as is, this will be the result — a far cry from frugal, even farther from wise, and it will give 34 percent of Americans far less ability to, in Jefferson’s words, "regulate their own pursuits of industry and improvement." As another tax season comes to a close, it’s a good time to consider the wisdom in these words of a Founding Father and former President.
I can think of a number of things more interesting to read about than tax law, but few things affect our lives more. As tedious or complicated as it may seem, our country stands at a significant tax reform crossroad, and people need to be aware of the decisions that face our nation with regard to certain aspects of the federal income tax.
One of the lesser-known aspects of the tax code has been gaining national attention and for good reason. The AMT is the tax paid when the government determines, through a complicated formula, that you haven’t paid enough federal income tax in relation to your income. Created in 1969, the AMT was formulated to ensure that extremely high income individuals who, through the legal use of all deductions and exemptions available to them, were able to avoid owing any income tax at all. Initially, the AMT accomplished what it was designed to do but now, more than 35 years later, it’s failing in its original intent.
At a Senate Finance Committee hearing last year, witnesses from the United States Treasury, the Congressional Budget Office and taxpayer advocacy groups testified to something some unsuspecting middle income taxpayers have recently discovered — the AMT unfairly burdens taxpayers and penalizes people who are married, have children and own property. This serious problem must be addressed immediately. With my colleagues on the Finance Committee, I have co-sponsored legislation that would repeal the individual AMT. If the AMT is left alone, middle income taxpayers will foot the bill for an increasing percentage of federal expenditures, making this unfair tax all the more difficult to repeal.
Some facts about the AMT and its effects over the next five years demonstrate the urgency of this problem.
- AMT was never indexed for inflation. The minimum exemption amount in 1969 was $30,000. In today’s dollars, that’s approximately $157,000. The current exemption amount, when a temporary (but minor) increase runs out at the end of this year, is $45,000 for married couples and $33,750 for most single taxpayers. At this rate, 34 percent of individual filers will pay the AMT in 2010. Of these 30 million or so filers, 53 percent will have incomes of less than $100,000.
- AMT does not allow for personal (child) exemptions, deductions of state and local income taxes, and places many taxpayers in a higher marginal tax bracket.
- By 2010, AMT will exceed revenue from regular income tax by $95 billion, up from $14 billion in 2004. This means that like it or not, we will, by default and without a national debate about merits or deficiencies, have what amounts to a 26 percent regressive national tax supporting the majority of federal spending.
- It’s estimated that the average AMT taxpayer owed an additional $6,000 in tax in 2004.
- The AMT requires millions of filers to compute their taxes twice, once to determine their standard tax liability and a second time (complete with a two-page form with eight pages of instructions) to determine if they are liable for the AMT.
- Farmers and ranchers are disproportionately affected by the AMT because many exclusions, credits and deductions they claim are disallowed under the AMT.
- The AMT was targeted to 155 wealthy potential taxpayers in 1969 who had legally avoided paying any income tax. In today’s dollars, that would be the same thing as people making $1.1 million avoiding up to $400,000 in tax liability.
- A single parent with three children making less than $100,000 was eligible to file a 1040EZ because he had no itemized deductions. The fact that he claimed his children as dependents required him to pay the AMT.
- A married couple with four children and one in college both worked outside the home. They were required to pay AMT equal to their entire interest and dividend income for that year, in effect, invoking a 100 percent penalty for wisely investing their hard-earned money.
- The AMT contributes to the phenomenon of people making investment and expenditure choices that minimize their tax liability. This deals the economy a negative blow by discouraging savings and investments.
- Compliance costs increase in direct proportion to the increase in the reach of the AMT across a wider span of income levels.
The cost of addressing the problem now is substantial, but still significantly less than if we wait even a few years down the road. In 2015, AMT will affect almost half of all individual filers, most unfairly, and the cost of repealing it at that point will eclipse the cost of repealing the regular income tax. This problem must be dealt with responsibly by looking at the potential for crisis in the near future. Immediate repeal, before we become further dependent upon revenues gained through AMT, is the wisest course of action.