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AMT: IT'S THE DISHONESTY

January 15, 2007

Some of the big-time blogs were discussing the alternative minimum tax over the weekend. The alternative minimum tax is computed with fewer deductions and credits, but with a lower top rate; you compute both "regular" tax and "AMT," and you pay the higher amount. The biggest culprits in triggering AMT are state and local taxes and business tax credits.

Mickey Kaus said that the hassle of computing tax a second time is the real reason people hate it. Ann Althouse replies, "No, Mickey, it's the money." ($4,900 for Ms. Althouse, a law professor in Madison, Wisconsin)

Even the Instapundit weighs in, blaming Turbotax for tax complexity. Of course, regular Tax Update readers know that the root of tax complexity is the HP 12-C financial calculator.

As a confirmed AMT taxpayer, I would tend to agree with Ms. Althouse - it's the money. When I can use the office tax software to do my own return, the complexity doesn't make computation much harder (though it makes tax planning more difficult).

THE AMT BAIT AND SWITCH

But to me, it's really the dishonesty. The AMT has provided cover for sleazy tax policy ever since it was enacted. It works like this: a politician promises a tax benefit. The tax benefit is written so that it doesn't work for AMT.

When the technicians compute the revenue effect of the tax break, they take into account that it won't work for AMT. This makes the tax break much less costly than it would be otherwise.

The politician gets to brag about a brave new loophole, and the taxpayers think he's a great guy, or gal. Then they complain about how that darn AMT got them. It's the ultimate bait-and-switch of tax policy.

This trick has been part of every major tax break in the last 20 years, and many of the minor ones. Perhaps the biggest example is the 2001 Bush tax cuts, which reduced the top regular tax rate from 39.6% to 35%. AMT rates weren't reduced, so many taxpayers had their regular taxes cut, only to pay AMT. Other examples of this are the deduction for state and local sales taxes, the hybrid car tax credit, and the research credit.

Like any bad habit, this one is catching up with Congress; absent new legislation, up to 20% of tax filers will pay AMT for 2007. The politicians are making loud noises about repealing AMT, but they can't afford to. If the Bush tax cuts are to be kept in place, the AMT will provide $1.3 trillion of tax revenue in the next 10 years. So don't believe any politicians who promise to repeal AMT; they'll get it back from you somewhere else. They have to.

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