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225 IRET Congressional Advisory 1 (2007)

handle is hein.taxfoundation/iretcgadv0222 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. May 30, 2007 Advisory No. 225 A MISERABLE TAX (THE AMT) MAY BECOME WORSE The individual alternative minimum tax (AMT) is a parallel income tax with complicated rules that differ from those of the regular income tax. To compute the AMT, one calculates the regular income tax and then the AMT. If the AMT exceeds the regular income tax, one must pay the government the difference, on top of the normal income tax. Many people are unaware of the AMT or assume it does not apply to them. Millions have learned otherwise only when their tax-preparation software or paid preparer told them they owed the AMT, or they received an official notice from the IRS dunning them for extra taxes, along with interest and penalty. A poorly conceived tax based on envy now hits millions of ordinary taxpayers. Congress enacted the first version of what became the AMT in 1969, following Congressional testimony by the Treasury Secretary that 155 high- income tax filers had not owed any federal individual income tax in 1967.1 This disclosure fed into the urban legend that the wealthy pay little income tax. In fact, higher income individuals pay a disproportionately large income tax share. In 2004 (the last year for which tax-share data are available), the top 1% of filers with positive incomes paid 36.9% of total income taxes, the top 50% paid 96.7%, and the bottom 50% paid just 3.3%.2 The 155 high-income filers who did not owe the individual income tax in 1967 were not accused of having violated the law but of having claimed deductions, credits, and exemptions that the law specifically permitted. For those troubled because 155 high-income filers (less than 1% of high-income filers that year) did not owe the individual income tax, the proper response would have been to reexamine the tax code's deductions, credits, and exemptions, not to slap on a strange and arbitrary parallel tax. Although the AMT was advertized as targeting a very small number of very wealthy individuals, it now hits millions of taxpayers, mostly middle class and upper-middle class, because it is not indexed for inflation and its rates have increased over the years. (The key rate hikes occurred in 1990 and 1993.) The normal income tax, in contrast, is partially indexed for inflation and its statutory rates have been reduced on several occasions. Among its special features, the AMT differs from the normal income tax in that it does not allow filers to claim personal exemptions, the standard deduction, any deduction for state and local taxes, or the miscellaneous expense deduction. (The last applies to certain unreimbursed employee expenses and certain expenses relating to producing and managing income.) In effect, the AMT treats these items as tax loopholes These are controversial changes from normal tax treatment, but they slid through with little debate because, politically, the AMT was created as a soak-the-rich tax and Congress gave little concern to the means used to soak the rich. As a result, some of the primary risk factors today for middle income and upper-middle income tax filers with regard to owing the AMT are having several children, living in high-tax states, and having miscellaneous expenses. g~*m A * * g6~ g ~gg

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