Scrap this Stealth Tax


Scrap this Stealth Tax

May 16th, 2001 3 min read

Senior Associate Fellow

You don't have to be a tax expert or a political maven to know this: If a liberal such as Charles Rangel, D-N.Y., says he'll work with the Bush administration to reform a certain feature of the tax code, it must be one thoroughly objectionable feature.

As a public relations expert following every blow in the fierce battle over President Bush's tax-relief package, I'd begun to wonder if anyone not squarely in the conservative camp would line up behind any part of the White House plan. I certainly didn't expect Rangel to offer his help.

But then, the Alternative Minimum Tax (AMT) has become so annoying for so many across the political spectrum that "strange bedfellow" political alliances formed to reform it should surprise no one.

The AMT was created in 1969 following public uproar over the news that about 155 people with incomes of more than $200,000 ($1.1 million in 2001 dollars) were using shelters to eliminate their tax bills. Under the AMT, taxpayers whose deductions make their tax bill "too small" (relative to their income) must refigure their taxes under another formula -- essentially forfeiting some of their deductions -- and pay a higher tax.

For years, conservatives have tried to get rid of it. And for just as long, liberals have defended it.

But while the AMT may have gotten a few dozen individuals to pay up in 1969, something in the law has gone awry in recent years. Because of changes in the tax code that brought deductions and shelters to those with middle or even modest incomes, the AMT doesn't sting just the wealthy anymore.

By 1998, 853,000 people were paying the AMT. By 2005, more than 6.7 million taxpayers will be affected by it. Yes, some of these folks are millionaires. But, by next year, 2,000 taxpayers with incomes of less than $10,000 a year and 15,000 families with incomes between $30,000 and $50,000 will have to pay the tax. By 2010, it will ensnare millions making less than $100,000.

Congress -- again, over objections from conservatives -- never has allowed the AMT to be indexed to inflation, which would ensure it continues to affect only the rich. Now, members must face the fact that many folks who now must pay the AMT aren't super-rich. That's why Rangel wants to help dismantle it.

Take, for instance, a family of eight that made $80,000 last year. They rent a house and have no other significant deductions. They take the standard deduction and all the personal exemptions and child tax credits they can. Without the AMT, this family would end up with a tax bill of about $5,377, or around 11 percent of its $50,250 taxable income. But the AMT increases the family's tax liability by more than $700 to $6,100, according to the Joint Committee on Taxation.

But indexing is only part of the problem. As the General Accounting Office noted recently, the AMT has complicated the tax system to the point of making it virtually impossible for the average citizen to figure out.

Know how to tell whether you should pay the AMT? First fill out your regular 1040 for the federal government. Then re-compute your taxes using a different income base, different exemptions and different tax rates to figure out what you'd pay under the AMT, because it treats certain deductions, exclusions and credits differently. You compare the amount you are to pay on the 1040 form with the amount calculated under the AMT rules. Which one do you pay? The higher one, of course.

Not surprisingly, the IRS can't ensure compliance without a costly and time-consuming field audit. As a result, it's an expensive tax to collect.

And what about the child tax credit? Yes, Congress may have intended a family with six kids to get back $3,000 to help feed and clothe the children, but before long, kids won't be deductible under the AMT.

As the Joint Committee on Taxation recently admitted, "individual taxpayers who the Congress intended to be eligible to claim certain nonrefundable personal credits will not be able to claim these credits because of the operation of the individual AMT."

Forget trying to fix the AMT through indexing or any other means. It's time for Congress to scrap this runaway stealth tax, and get on with the business of simplifying the tax code and letting people keep more of the money they earn.

Khristine Bershersis manager of media relations at The Heritage Foundation, a public policy research institute.

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