The Alternative Minimum Tax
Taxes are a contentious subject. People with high incomes often point out that low income people pay far too little in taxes. Low income people counter that the rich use loopholes to avoid paying their share. The middle class points out that both higher and lower income brackets get generous tax breaks, leaving them to pay the lion’s share of the burden. This eternal debate has inspired many measures that attempt to fix the problem. One such measure is the AMT (Alternative Minimum Tax) that has been added to the tax code.
What is the Alternative Minimum Tax?
Essentially, the AMT is a measure meant to address the populist concept that the richest people in the country are not paying enough taxes. What it amounts to is an additional tax for higher wage earners.
Problems With ATM?
There are three basic problems with the current implementation of the AMT.
First, it is pointlessly complex. Within a US Tax Code that is already about as complex as mapping the human genome, the ATM adds an additional layer of rules and regulation. Whether someone is subject to the tax varies from state to state, making things even worse.
The second issue with the AMT is that it wastes time and money for taxpayers. Based on 2013 numbers, 9.7 million taxpayers were forced to perform a second calculation to determine whether they were subject to AMT. Of those, only 3.9 million were actually required to pay. In other words, almost 6 million taxpayers were needlessly forced to either pay for their taxes to be calculated a second time or make the effort to recalculate everything themselves.
Lastly, the measure is counterproductive. The purpose was supposed to close tax loopholes for the mega wealthy. What it actually does is eliminate deductions for those with higher than average salaries. The mega wealthy tend to avoid having a high taxable income on paper by focusing on investments and shielding regular income behind corporate walls. The corporations divide the wealthy person’s income in such a way that each entity files a separate income that is small enough not to trigger higher tax brackets and the ATM.
What Will Change in the Future Regarding the AMT?
Based on its unpopularity, it is a near certainty that the AMT will not stand as written for very long. There are two things that might happen. Which really depends on the flavor of congress and President that gain power together in the near future.
One option is that the AMT will simply be eliminated. Just taking the AMT off the books will simplify tax calculations and stop the penalization of people with high paying jobs for things like having children.
The second option is the AMT being replaced by something that actually addresses the ways the richest people avoid paying income tax. While probably the better route to curbing the growth of income inequality, this would require large changes to corporate tax regulations and tax rates on investment income.
The AMT can be seen as a positive attempt gone awry or paying lip service to the demands of the majority. Either way, it fails to deliver the reform it promised.