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GOING OVER THE AMT CLIFF

December 07, 2006

The Wall Street Journal, in a rare editoral page convergence with the Des Moines Register, ripped the alternative minimum tax yesterday. Their editorial ($link) included this chart of how AMT will increase sharply next year under current law:

Arnold Kling at Econlog sees the chart and ponders why so many taxpayers would suddenly face AMT.

The answer lies in the way Congress has been kicking the AMT problem down the road a year or two at a time since 2001. As Dr. Kling notes, the Bush tax cuts lowered the regular tax rates without lowering the AMT rates. As AMT applies when it is higher than regular tax, the arithmetic makes more folks AMT taxpayers.

Congress has fought the arithmetic with "temporary" increases in the AMT exemption. The 2006 exemption is set at $62,550 for joint filers and $42,500 for single taxpayers. Without further legislation, the exemption reverts in 2007 to its "permanent" level of $45,000 for joint filers and $33,750 for single filers. That will be enough to make millions of Americans pay AMT. Hence the jump in the chart above.

Why such obviously foolish tax policy? It's part of Congress' old game of making tax breaks "temporary" to disguise their true cost - the same game involved with the tax breaks in the "extenders" bill that is supposed to come out this week to preserve some other popular tax breaks, including the research credit. With AMT the numbers are so big for each year's temporary break that it is becoming hard for them to pull off.

The silver lining? They might be forced to look at actual tax reform; they might be forced into good policy because they have exhausted the alternatives.

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