Hooray for AMT Gridlock!

In the overview I posted of my political beliefs I described my discomfort with the idea of an alternative minimum tax system. For those of you who don't know about the AMT, in short, it's a part of United States federal income tax law that requires the calculation of income tax by two fairly separate methods, and then requires (more or less) the taxpayer to pay whichever is higher. The AMT calculation features lower marginal rates than the standard tax calculation, but disallows many common deductions such as the mortgage interest deduction, a deduction for the payment of state and local taxes, incentive stock option gains.

The AMT was originally devised to try and fix what many folks perceived as loopholes in the tax system that allowed very wealthy individuals to avoid paying taxes simply because they had a lot of otherwise allowable deductions. However, the AMT single "tax bracket" of about 27% starts at a taxable income level which is not indexed to inflation. Because of this, the AMT has come to hit more and more US taxpayers each year, often by (unpleasant) surprise.

The complexity, unpredictability, and applicability of the AMT by middle-income taxpayers has led to calls for repeal of the AMT.

I don't believe that will happen.

The primary reason is money. Estimates I've seen for the cost of even indexing the AMT tax brackets for inflation (a far more modest step than AMT repeal) would cost the government over $100 billion a year. To repeal the AMT, Congress would need to either raise tax rates or remove deductions, either of which would be unpopular and visible.

For politicians, the status quo has much to offer. The number of people badly affected by AMT bracket creep is low enough to avoid large-scale taxpayer discontent. Better, it results in increasing federal income tax revenue at a time of record debt and deficits.

Now, no discussion of any tax change or situation would be complete without a discussion of the consequences of this on Democrats, Republicans, the poor and the rich, and of course my own personal take. So let's dig into the consequences of "leaving it as is."

As I noted, it "raises taxes" without too much pressure from taxpayers. Politicians like that, and can quell the remaining affected taxpayers by floating proposals for reform that will never pass. I like it too, not because I'm for paying higher taxes, but because I'm for balanced budget reform, I believe that we shouldn't be creating an unfair burden on future generations of taxpayers.

Over time, the "status quo" will begin to phase out the individual mortgage interest deduction. This wildly popular deduction is both regressive (if you can afford to buy a home, you're not poor), and environmentally ruinous, creating the suburban sprawl that impedes the effectiveness of mass transit, increases air pollution, and destroys wilderness. Removing the mortgage interest deduction would be the perfect Democratic plank were it not for one thing--the popularity of "making it easier for me to by a house." While I love having a house, I'm not sure poorer folks should be subsidizing my own "American dream", and in combination with the significant environmental effects of sprawl, I'm once again in favor of the AMT "status quo".

Over time, the "status quo" will phase out the state income tax deduction, which will have a larger negative impact on the typically higher-taxed "blue states". Republicans cheer this effect, Democrats decry it. Ignoring matters of self-interest (I live in California) and the partisan political pandering, I can see a benefit of this phase out. To me, the federal income tax deduction for state taxes feels a bit like a subsidy for states with higher state income taxes paid for by states with lower state income taxes, the "status quo" over time would restore what seems a fairer balance to the tax system.

Thus, I've come around to the position that the AMT should stay in place "as is" at least for the foreseeable future. I do decry the complexity and "surprise" value of the AMT, but I now find that more than balanced by the positive effects the status quo will have on the environment, tax fairness, and the federal debt. Hooray for AMT gridlock.