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January 2002; Volume 20, Number 1

The Sneaky Tax

by Gregory Bresiger

And you thought the Alternative Minimum Tax (AMT) was only for fat cats! The hired help on the Potomac, many of whom reluctantly approved a piddly little tax cut this summer, are going to give a new meaning, over the next few years, to that wonderful principle of fiscal skullduggery and political mountebankery called "making the rich pay." 

Only the hated rich, in todayís despise-the-successful world, can include a single person who is the head of a household and earns $33,750 a year. Not exactly anyoneís idea of Donald Trump!

The Alternative Minimum Tax is a separate system of income tax that parallels the regular income tax. Unlike the regular system, once the AMT is triggered, fewer exemptions and credits are allowed. The tax came out of the Minimum Income Tax Act of 1969, which was aimed at the few people with incomes of $200,000 who had found a way not to pay any income tax. The AMT was going to cover these horrendous high-income taxpayers who skillfully and legally used a complex tax code. 

Back in 1969, Congress was only aiming at about 150 people, so few people cared about this arcane tax. The AMT, and how and when it is applied, is, of course, a tendentious subject, often mystifying the most well-heeled tax experts. If they take all the deductions their clients appear to be entitled to, they are lessening the clientís tax burden, but possibly subjecting the client to an audit. If they go easy on the deductions, even though they think their clients are entitled, they subject clients to a bigger tax bill and probably lose the client to a more aggressive tax preparer. 

In the end, the goal of the AMT was to make the rich pay. 

But a few unexpected things happened on the socialist road to "making the rich pay." First, tax preparers, lawyers, and others who have to try to figure out this complicated levy have become frustrated. The original tax legislation, for example, was nineteen pages of average-size type in the statute book. 

However, with explanations and amendments, by 1999 AMT legislation took up fifty-six pages of small type in one printed version of the Internal Revenue Service Code. Thatís why the American Bar Associationís Section on Taxation, the American Institute of Certified Public Accountants, and Tax Executives Institute donít want the AMT "reformed." They want it abolished. 

Second, the AMT, unlike the regular income tax, was never indexed for inflation. And the alternative system was conceived at a time when the top rate was 90 percent, but the system contained many more deductions, most of which were eliminated by the various tax reforms of the 1980s and 1990s. So today the definition of "the rich" has expanded and over the next twenty to thirty years the definition of the rich who pay the AMT will grow to include many people who are, by an objective estimate, not rich.

"In 1990, the AMT financially affected only 132,000 taxpayers. In 2000, it affected an estimated 1.3 million taxpayers, and in 2010, it is projected to affect 17 million taxpayers," according to a May report by the Joint Economic Committee of the United States Congress. 

When the AMT began, those with a $20,000-a-year or less income in 1979 were exempted. That would mean that, correcting for the inflation, today the AMT exemption should be about $54,000 for married couples filing jointly and $41,000 single filers. It isnít. Congress, which in its wisdom never forgets to raise its own salaries, has moved slowly in raising the AMT exemption. 

The result: The exemption is today only $45,000 for married couples and $33,750 for single filers. That, of course, means tens of millions of Americans are at risk of getting torpedoed by the AMT. And tens of millions of others, who today donít feel rich, will be treated like fat cats who should be paying through the nose because they are suddenly successful or because another person in the household has committed the egregious sin of bringing more income into the house.

Finally, as ridiculous as this all seems, it has all happened many times before as the unintended consequences of big government again wreak havoc with the lives of average people. The federal income tax was designed to "get" the rich. In 1913, one had to be in the top 5 percent or so of wage earners to pay income tax. Does anyone today think that the income tax is a rich manís tax? Kurt Schuler, a senior economist to the Joint Economic Committee, warned that history is about to repeat.

"Like the income tax itself, the AMT was enacted as an attempt to target the rich but has become a tax on parts of the middle class," he writes. "If nothing is done to reform the AMT it eventually will become the dominant type of income tax. If Congress could have foreseen in 1969 how the minimum tax would turn out, it is doubtful they would have approved it."

Maybe. But itís doubtful that Congress will, without much more damage to average people, approve ending a doubt that provides such wonderful opportunity for demogoguery. 

* * * * * 

Gregory Bresiger, a business writer and editor living in Kew Gardens, New York (gbresiger@hotmail.com), recommends Income Tax, The Root of All Evil, by Frank Chodorov.

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