COVER STORY

Zooming In

The perma-crisis of the alternative minimum tax tells you everything you need to know about the lame duck.

Nancy Cook
June 28, 2012, noon

The al­tern­at­ive min­im­um tax, a crit­ic­al and highly tech­nic­al policy, is like a weed in the tax code that politi­cians on both sides of the aisle want to whack. And yet it con­tin­ues to morph and grow. By the end of 2012, Con­gress must pass yet an­oth­er meas­ure to en­sure that the AMT ap­plies to just a few mil­lion people, or else it will plague 31 mil­lion, a rise of more than 600 per­cent over the 4 mil­lion who cur­rently qual­i­fy for it. A tax meant for the few will be­come one that tar­gets the many.

“The AMT is just an old friend,” Lindy Paull, a lob­by­ist at Price­wa­ter­house­Coopers and a former chief of staff for the Joint Com­mit­tee on Tax­a­tion, says with a sigh. “Every year, it gets more ex­pens­ive to fix it, but a per­man­ent solu­tion has not been achiev­able in this en­vir­on­ment, where you’re not re­writ­ing the tax code.” Like the so-called doc fix for Medi­care phys­i­cians, the al­tern­at­ive min­im­um tax gets a tem­por­ary an­nu­al patch, which staves off cata­strophe for just a while longer but adds com­plex­ity to the already ar­cane tax sys­tem. Mem­bers of Con­gress will battle over policies that they agree are wrong, but they won’t tackle the thank­less task of fix­ing them.

In that way, the AMT em­bod­ies everything that’s wrong with the up­com­ing lame-duck ses­sion, when tril­lions of dol­lars of fisc­al policy are up for grabs and when Con­gress can once again de­fer tough de­cisions. It last ex­pired at the end of 2011 and awaits re­new­al. Now, mem­bers will likely wrap it up, along with a raft of oth­er fisc­al-cliff is­sues, dur­ing the postelec­tion ses­sion. After all, who needs more than six weeks after a bruis­ing elec­tion cycle to hash out ma­jor tax and spend­ing policies that af­fect mil­lions of Amer­ic­ans? “It’s clearly not the way we should do tax policy,” says Rober­ton Wil­li­ams, a seni­or fel­low at the Urb­an In­sti­tute and former deputy as­sist­ant dir­ect­or for tax ana­lys­is at the Con­gres­sion­al Budget Of­fice.

Con­gress cre­ated the al­tern­at­ive min­im­um tax in 1969, when law­makers real­ized that about 155 uber-rich people did not pay any taxes be­cause they had stashed their money in shel­ters. Ori­gin­ally, the policy tried to force wealthy people to pay the fed­er­al gov­ern­ment a min­im­um amount of money. That’s the same philo­sophy be­hind Pres­id­ent Obama’s “Buf­fett Rule,” which would es­tab­lish a min­im­um tax rate for house­holds that earn more than $1 mil­lion each year.

But the AMT is not in­dexed to in­fla­tion, so over time it began to hit a dif­fer­ent demo­graph­ic. Now, its biggest tar­gets in­clude fam­il­ies with chil­dren who live in ex­pens­ive states such as Cali­for­nia and New York and who earn between $200,000 and $500,000 per year. These people are hardly des­ti­tute, but they’re also not part of the 1 per­cent. And the ef­fect on the middle class could be severe without a patch. In 2011, less than 0.2 per­cent of mar­ried couples with two or more chil­dren and ad­jus­ted gross in­come between $75,000 and $100,000 paid the AMT.

If Con­gress does not act by the end of 2012, the Tax Policy Cen­ter es­tim­ates that it will hit 90 per­cent of that group — a dif­fi­cult idea to stom­ach in an elec­tion year centered squarely on the health of the eco­nomy.

So why not ditch the al­tern­at­ive min­im­um tax al­to­geth­er? Be­cause it has be­come too ex­pens­ive to re­peal. Even with the tem­por­ary patches, the AMT raised an es­tim­ated $39 bil­lion in 2011, ac­cord­ing to the non­par­tis­an Tax Policy Cen­ter. And if Con­gress does not ad­dress the AMT, the cen­ter pre­dicts that it will bring in $132 bil­lion in 2012. That’s 11 per­cent of the en­tire in­di­vidu­al in­come tax for this year — a huge wad of cash from the up­per middle class that a rev­en­ue-starved Con­gress could surely use, without tech­nic­ally hav­ing to say it raised tax rates.

That price tag is what has kept the AMT alive for so long, even with its un­in­ten­ded tar­gets. Why slaughter the golden goose? Con­gress fought for weeks over something as ano­dyne as in­terest rates for stu­dent loans (a $6 bil­lion prob­lem), so it’s not sur­pris­ing that mem­bers are much fur­ther from con­sensus on how to find the $1.4 tril­lion through 2022 they would need if they re­pealed the AMT.

In­stead, the dream is that Con­gress will fi­nally fix the AMT — 43 years after its en­act­ment — as a part of a broad­er tax-code over­haul. “Hope­fully, in the con­text of a broad-scale re­form, the AMT can be com­pletely re­thought, elim­in­ated, or fo­cused more ap­pro­pri­ately,” says Ed­ward Klein­bard, a pro­fess­or at the Uni­versity of South­ern Cali­for­nia Gould School of Law and a former chief of staff at the Joint Com­mit­tee on Tax­a­tion. This could in­clude re­peal­ing the AMT en­tirely and in­stead tax­ing wealthy people through high­er mar­gin­al rates or in­creased taxes on di­vidends and cap­it­al gains, the lat­ter two be­ing a prime way that truly wealthy people have be­nefited from the cur­rent tax policy.

But re­form­ing the tax code is like wish­ing upon a star. Ex­perts hoped that the su­per com­mit­tee would do it; now they hope that the lame duck will do it. To con­vey ur­gency, people have af­fixed in­creas­ingly apo­ca­lyptic de­scrip­tions to the is­sue — the su­per com­mit­tee, the fisc­al cliff, Taxmaggedon, the tax bomb — but, so far, none of that dooms­day rhet­or­ic has forced Con­gress to ac­tu­ally do any­thing.

Nev­er­the­less, every­body ex­pects a short-term fix, since that is the an­nu­al rite. A broad con­sensus among con­gres­sion­al aides and lob­by­ists holds that law­makers will patch the AMT by the end of 2012, even if it does so at the 11th hour. But, the idea that the AMT still ex­ists and thrives in our tax sys­tem of­fers a broad­er al­legory for the lame-duck ses­sion. If no one in Wash­ing­ton can sum­mon the will to fix a widely des­pised tax, what makes any­one think that Con­gress and a pres­id­ent can agree on sub­stant­ive le­gis­la­tion dur­ing the lame duck to re­solve our tax and spend­ing prob­lems — the same ones we’ve known about for years?

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