Monday, November 07, 2005

In defense of the AMT...

Allan Sloan in Newsweek has some good criticisms of the tax reform recommendations proposed by Bush's panel... it will hurt home values by removing the deduction for property taxes and cutting back the deduction for mortgage interest... in order to give more favorable treatment to investment income, taxpayers without such income will take a hit because of Bush's insistence that the recommendations be 'revenue neutral'...

But Sloan, like so many other people, is off the mark with his criticisms of what he refers to as the "hideously complicated" AMT.

As one of the 3.6 million taxpayers who paid the AMT this past year, let me say that the AMT is NOT THAT BIG A DEAL! In fact, if Bush wanted to really re-do the tax code, he ought to scrap the so-called 'regular' tax code and have everybody pay the AMT.

First, the AMT is not inherently that complicated. Its complexity comes from the fact that, the way the system is currently set up, taxpayers have to do their taxes the regular way, then adjust their tax return - adding some items, subtracting others - in order to figure out what, if any, their AMT tax liability is. Well. aside from the fact that for $30, any tax preparation program will automatically do all of the AMT calculations and prepare the necessary forms, figuring out one's AMT by hand doesn't take much more than another 20 minutes on top of the time spent preparing the 'regular' return. And it could be made even easier if taxpayers were able to determine at the start whether they were subject to the AMT, and if they were, given forms to calculate their tax liability right away, without having to go through the two sets of forms as is now the case.

Second, the AMT is conceptually much simpler than the 'regular' tax. It's much like the flat tax conservatives are supposed to be in favor of. You plug in your income, you subtract a few deductions and multiply the net by one of only a couple of different rates in order to figure out your taxes. There are fewer deductions. There aren't pages and pages of tax rate tables. If Bush's commission really wanted to simplify the tax code, they could have simply suggested getting rid of everything but the AMT.

Third, the AMT is simply a floor that sets a minimum amount of tax - based on a given income - a taxpayer must pay. The lower the regular tax rate, the more people who will be hit with the AMT. And the higher the rates, the fewer people who will get hit. Note that one of the reasons so many people are being affected by the AMT is because Bush lowered the regular tax rates to the point where one's AMT tax is higher than their 'regular' tax bill. Had the Democrats gotten their way and kept Bush from cutting tax rates, or kept him from cutting the rates to the extent that he did, there woule be a whole lot fewer people paying the AMT right now.

Finally, the concept of the AMT is not without precedent in the tax code. The AMT is conceptually similar to the phase out of personal exemptions and itemized deductions for higher income taxpayers. With these phase outs, the higher one's income, the less credit you get for such things as mortgage interest, kids, charitable contributions and property taxes. It's the government's way of saying: we'll give you a deduction, but only up to a point. Interestingly, despite what I am figuring are millions of people subjected to these phase-outs, there is next to no cry for eliminating them (disclosure: I am affected by these phase outs and actually 'pay' more in taxes as a result of these phase outs than I pay in AMT).

Granted, I don't like the AMT. Nor do I like the phase out of itemized deductions and dependent credits. Then again, I don't like paying taxes at all. At least not the amount I do.