A Stitch in Haste

"Taxes are like sacrifices to tribal gods -- just less productive." --Doctor Who

If you need a briefing on the fiscal cancer known as the Alternative Minimum Tax, the New York Times has a fairly good primer today:

[The AMT] is increasingly being applied to families with incomes of $75,000 to $250,000 a year who claim relatively high deductions -- like the ones for property taxes, state and local income taxes -- and the exemption for children. When it does apply, it cancels some of those deductions.

The impact is about to mushroom. Barring a change in the law, almost 19 million taxpayers will be subject next year to the alternative minimum tax, or A.M.T., up from roughly 3.4 million this year and 1.3 million in 2000, according to the Tax Policy Center, a Washington research group whose calculations on this issue are widely accepted.
...
Left unchanged, the alternative tax would produce more revenue by 2009 than the ordinary federal income tax, according to the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute.
...
The alternative minimum tax began in 1969, after Joseph W. Barr, the departing Treasury secretary under President Lyndon B. Johnson, told Congress that 155 wealthy families had used loopholes to avoid paying any federal income tax in 1967. Mr. Barr warned of the possibility of a middle-class taxpayer revolt in response.
...
The triggers for the alternative tax have not kept up with inflation, causing it to capture many people whose main deductions come from nothing more exotic than children and local taxes. People in towns with high property taxes sometimes face the A.M.T., while others with similar incomes in the next town do not.

So here's the current Beltway thinking (or lack thereof): A program meant to smack down 155 deadbeat super-rich families now imposes a surcharge -- a "rich tax" -- on households with as little as $75,000. You make $38,000 and your spouse makes $38,000 too? Congratulations! You're "rich"! How does it feel? Oh, and by the way, be sure to pay your AMT.

In four years, the AMT will surpass the "plain vanilla" federal income tax, and yet we still hear claims that taxes aren't progressive enough, that the "rich" (which, if it doesn't alredy, may soon mean you) don't pay their "fair share" -- they can afford "just a few dollars more" in the form of "Scrap the Cap", or the "Nip/Tax," or whatever else the politicians can think of.

Meanwhile, note the bipartisan gobbledygook on this issue:

--The Democrats: "Look, the AMT is being paid by the Blue States! No fair!" (About half the people paying the AMT live in one of four states -- California, Massachusetts, New Jersey and New York -- all "Blue.")

--The Republicans: "Look, we're still subsidizing those high (Blue) state taxes through their deductibility on traditional federal taxes! No fair!"

Meanwhile, more and more taxpayers get more and more screwed.

As I've said: The "penny in your pocket rule" reigns supreme. And now, with the AMT, they're picking your pocket with both hands.

This is why I'm cynical about tax reform and prefer to focus on Social Security. You can simplify income taxes today, but it just becomes a matter of time before some change is made, some cry of "No fair!" resonates and, in the name of "fairness" and "equity" a provision is made and a deduction allowed (or disallowed) or a rate is changed. Then another. And another. Then inflation and wage growth kick in and the next thing you know the system is right back where it started (i.e., unfair and inequitable).

And, as I've blogged previously, that goes double when it comes to proposals to replace the federal income tax with a national sales tax. Far too dangerous to risk.

Maybe, just maybe, we'll someday have an "Alternative Minimum Budget." One that would make this whole quandary moot.

Someday.

UPDATE: Here's an interesting new piece from the Urban Institute on the AMT. Money quote --

Memories are short, but the AMT was rejected as the best way to reform the income tax under the Treasury’s tax reform proposals in 1984. With a good regular tax, there was no reason to identify items of preference for another tax. By the time that Congress got around to amending the Treasury proposals on the way to the Tax Reform Act of 1986, however, it went through several stages of restoring some preferences to taxpayers, losing more revenues than it could afford, then coming in the back door by adding complex items like the AMT. In some cases, putting items in the AMT was an indirect way of tackling preferences; in other cases, there was little excuse for including the items because they really weren’t preferences in the first place.

In other words, real-world tax simplification is a myth. The politics of pull, combined with the death of fiscal conservatism, makes it simply impossible to effect true tax simplification. There will always, always, be degradation as soon as some group or politician says "we shouldn't tax this" or "we shouldn't exempt this" or "the rich can afford just a little bit more."

The correct course of action is to focus on runaway government spending and regulation -- fighting (or claiming to fight) pork and bloat is always popular, as is promising to ease the regulatory burden on business, especially small business (which is the backbone of the economy).

Reduce the budget, reduce the constraints on the economy, and taxes will take care of themselves.

Related Posts:
More on the Deductibility of State & Local Taxes
Nip/Tax
On Property Taxes and Assessments
Sales Taxes and "Helping the Poor"
Red Tax, Blue Tax