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
Add to Briefcase
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?

What We're Following See More »
WOULD HAVE BEEN HIS SECOND STINT
Howard Dean Pulls out of DNC Race
2 hours ago
THE LATEST

Howard Dean, the former Vermont governor and Democratic National Committee chair, announced he's pulling out of the running to regain the chairman's post. Dean "announced in a pre-recorded video to a conference of state Democratic chairs that he would step aside to allow for a new face to lead the party as it seeks to rebuild."

Source:
RUBENSTEIN FUNDING ELEVATOR REPAIR
Washington Monument Closed until 2019
4 hours ago
THE DETAILS

"Once again, businessman and philanthropist David M. Rubenstein has come through for the National Park Service. This time, he's pledged funding needed to modernize the Washington Monument's elevator-- but the monument will remain closed until 2019 while repairs and improvements are underway. Rubenstein's donation of between $2-3 million, announced Friday, will correct those ongoing elevator issues, which have shuttered the monument since August 17."

Source:
$618 BILLION IN FUNDING
By a Big Margin, House Passes Defense Bill
7 hours ago
THE DETAILS

The National Defense Authorization Act passed the House this morning by a 375-34 vote. The bill, which heads to the Senate next week for final consideration, would fund the military to the tune of $618.7 billion, "about $3.2 billion more than the president requested for fiscal 2017. ... The White House has issued a veto threat on both the House and Senate-passed versions of the bill, but has not yet said if it will sign the compromise bill released by the conference committee this week."

Source:
FILED BY JILL STEIN
Michigan Attorney General Sues to End Recount
8 hours ago
THE LATEST

Bill Schuette, Michigan's attorney general, has filed a lawsuit on behalf of the state to halt the recount of the state's voting results. The recount was elected by Green Party candidate Jill Stein. Schuette says the recount shouldn't occur because Stein cited no evidence of voter fraud or tabulation error.

Source:
SUCCEEDS UPTON
Walden to Chair Energy and Commerce Committee
9 hours ago
THE DETAILS

"Republicans have elected Rep. Greg Walden (R-OR) the next chairman of the powerful House Energy and Commerce Committee. Walden defeated Reps. John Shimkus (R-IL) and Joe Barton (R-TX), the former committee chairman, in the race for the gavel" to succeed Michgan's Fred Upton.

Source:
×
×

Welcome to National Journal!

You are currently accessing National Journal from IP access. Please login to access this feature. If you have any questions, please contact your Dedicated Advisor.

Login