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Tuesday, July 26, 2005

Beale on Congress Fiddles While Middle America Burns: Amending the AMT (and Regular Tax)

Beal75 Ssrn_logo_32Linda M. Beale (Illinois) has posted Congress Fiddles While Middle America Burns: Amending the AMT (and Regular Tax), 6 Fla. Tax Rev. 811 (2004), on SSRN.  Here is the abstract:

Several features of the budgetary context and the interaction of the alternative minimum tax (AMT) and the regular tax system suggest that the AMT will increasingly reach into the pool of ordinary taxpayers over the next few years. Taxpayers with incomes of less than $100,000 may in fact constitute the majority of AMT payers. The increase in taxpayers subject to the AMT over time creates a quandary - the longer Congress waits to reform the AMT, the more it will cost to do so, as the AMT becomes an increasingly important source of revenues. Many commentators have nonetheless called for outright repeal of the AMT. This article, however, urges that the appropriate response to these challenges should be AMT reform, not repeal.

The article first explores the economic context in which any AMT changes must be considered, including the substantial tax cuts enacted from 2001-2003 and the related economic environment of rapid growth in both federal deficits and the federal debt burden, increasing income inequality, and the increasing number of consumption-base features in the income tax system. The article then briefly sets out the normative perspective that I believe should guide tax policymakers in making the difficult choices among possible AMT changes. The article next evaluates common criticisms of the AMT made by those favoring repeal and finds the arguments for repeal unconvincing. There are strong normative, and practical, reasons to retain the AMT despite its flaws.

As an alternative to repeal, the article proposes a solution to the AMT quandary that addresses the most blameworthy features of the current AMT system while continuing to use the AMT to target taxpayers who benefit from aggregation of substantial preferences under the regular tax. Reforms include protections for what might be called ordinary taxpayers and additional preferences that should be taken into account in the AMT system to appropriately target higher-income taxpayers. To further limit the harmful growth of inequality among taxpayers, the article also argues for related, concurrent changes to the regular tax system. Finally, the article suggests that Congress should consider withdrawing some of the 2001-2003 tax cuts for taxpayers in the highest income brackets, to the extent necessary to fund needed AMT changes and at the same time ensure overall progressivity of the federal tax system.

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