Centerfield

The Blob That Ate The Tax Code

I recently posted over at my own weblog about how I would like to see a third political party formed that is based on common sense. One area of government that seems to have gotten totally out of control is federal income taxes. I've been using Turbo Tax to do my income taxes since the mid-90's so I don't know what it's like to do them manually any longer, but I suspect that it's becoming impossibly complicated for most middle-income wage earners. I also suspect that one of the major reasons for the complication is the Alternative Minimum Tax (AMT).

The AMT was instituted in 1969 as a means of ensuring that the very wealthy would not be able to reduce their tax liabilities below an acceptable level, or avoid taxes altogether. A laudable goal, to be sure, but the AMT has a serious flaw with unintended (I would hope) consequences — it was never indexed to inflation. As a result, taxpayers the AMT was never intended to affect will now be impacted. According to Smartmoney:

While only 19,000 people owed the AMT in 1970, 2.6 million are paying it now, according to the IRS.

What happened? Inflation, mostly. While the “regular” tax brackets, exemptions and standard deductions are adjusted annually for inflation, the AMT brackets and exemptions are not, so many people whose income has grown with the economy enter the dreaded AMT zone each year. Especially vulnerable are people with income over $75,000 and some large deductions, but not the exotic ones that were originally targeted by the AMT's creators. Most vulnerable are taxpayers with several children, interest deductions from second mortgages, capital gains, high state and local taxes, and incentive stock options.

In order to find out if you owe AMT, you need to fill out a completely separate form, often more than one, from the 1040. According to the Tax Policy Institute, “The AMT is notoriously and pointlessly complex. The Internal Revenue Service and the Taxpayer Advocate have flagged the AMT as one of the most complicated tax provisions to comply with and administer. Most people required to fill out the AMT forms end up owing no additional taxes. The AMT also creates complicated interactions with the regular income tax.” For more reasons why the AMT doesn't work, check out their Facts and Projections.

So why isn't something being done to fix or get rid of the AMT? According to U. S. News & World Report's Jodie T. Allen,

The House recently passed a fix-up that would arrest the growth of the AMT — for one year. Why not for all time if it's such a plague? Because repealing it outright would be hugely expensive — even the one-year fix costs $17 billion. A full repeal, says the Congressional Budget Office, would add nearly $550 billion to the deficit over the next 10 years. And if the Bush tax cuts are made permanent, the cost of abolishing the AMT would rise to $658 billion, since, if it were still on the books, it would reclaim much of the lost revenue.

In addition, according to the Tax Policy Institute, “More than 75 percent of the benefits of repeal would go to households with income above $100,000 in 2010.”

It is clear that tax reform is becoming increasingly necessary. What is also clear is that this is one issue the politicians consider anethema. For some reason, they can't see beyond the possibility of killing the proverbial goose and golden egg. That's unfortunate, because even I, with no real experience, could come up with some reasonable alternatives — at least for individuals. If I can do that, surely the professionals could (and probably have) provide workable solutions for re-writing the tax code that would both simplify it and provide sufficient revenue for the government to continue to run at its current inefficiency.

(Cross-posted at Ruminations & Ramblings.)

Posted by Heather at May 23, 2004 08:07 PM