TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Saturday, December 9, 2017

Schmalbech: The AMT Has Metastasized. It Is Time To Rip It Out Of The Tax Code.

Wall Street Journal op-ed:  End the Alternative Minimum Tax, Don’t Mend It, by Richard Schmalbech (Duke):

There are many unfortunate provisions in the tax-reform bills recently passed by the House and Senate, but at least one good one: The House bill would repeal the Alternative Minimum Tax. The Senate bill, in an effort to find a little revenue, would preserve the AMT but somewhat reduce its bite.

As a professor of tax law, I am aware of many terribly defective tax rules. But no feature of the Internal Revenue Code seems to me less rational than the modern AMT. Congress created the AMT in 1969 to impose at least some income tax on what committee reports described as “a small minority of high-income individuals” who had manipulated the then-current rules “to escape tax on a large proportion of their income.” Lawmakers revised the rules to target deductions of “tax preference items,” such as mineral depletion allowances, intangible drilling costs, and accelerated depreciation, as well as a special deduction then available for capital-gains income.

The core idea was to impose a lower tax rate, but on a broader tax base, stripped bare of most deductions. For a while, this mostly worked. The AMT was a nuisance to a few high-income people—never more than 0.5% of all taxpayers in the early years—but otherwise was largely harmless. Yet by a series of small and unintentional steps, the AMT became both broader and less focused on wealthy tax-avoiders. ... Less than 20% of taxpayers with adjusted gross incomes above $1 million [pay] the AMT, compared with about 60% of those with incomes between $200,000 and $500,000. ...

The AMT is a compliance nightmare, too. It imposes alternative computations on a wide range of items, requiring taxpayers (or their accountants) to grapple with two separate sets of tax rules. ...

As the conference committee begins negotiating to reconcile the two bills, the better approach is obvious. The House plan eliminates these problems by eliminating the AMT. The Senate bill offers a little relief, but does nothing fundamentally to fix a tax provision that badly needs to be repealed.


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