The Alternative Minimum Tax Reform Amendment is a substitute for the bill it is attached to, the “Middle-Class Alternative Minimum Tax Relief Act.” Both the legislation and the substitute amendment provide exemptions from the Alternative Minimum Tax (AMT). The AMT was pioneered by Richard Nixon in 1969 to assure that the wealthy paid their fair share of taxes. However, the AMT was never adjusted for inflation, and because the amount of income that would have made someone wealthy 35 years ago will now only permit a middle-class standard of living, the tax increasingly falls on middle-class Americans. The amendment would exempt all individuals making less than $125,000 and all married couples making less than $250,000 from the AMT and would gradually phase in AMT requirements for incomes above these levels. To offset this loss of tax revenue, the amendment restricts certain corporate tax shelters. The AMT exemption applies for only one year, so the amendment also calls on the Secretary of the Treasury to make legislative recommendations to Congress to permanently reform the Alternative Minimum Tax. While this amendment failed, the original bill, HR 4227, did pass and was signed into law. HR 4227 extends for one year the current AMT income exemptions of up to $40,250 for individual taxpayers and $58,000 for married couples but adds to the budget deficit because it does not offset the loss of tax revenue.
The Middle-Class Position:
The Middle Class Supports. The Alternative Minimum Tax was originally an innovative way to make sure corporations and rich individuals couldn’t exploit tax loopholes to avoid paying taxes completely. To some extent, it still fulfills this role. But as inflation takes its toll, more middle-class families end up paying taxes at the AMT rate rather than their regular income taxes. The tax is most likely to fall on middle-class families with children and those who live in areas where state taxes are high. The AMT makes the tax code significantly more burdensome and complicated for middle-class families. This amendment offers a simple and commonsense, if temporary, solution. It’s also significant that the amendment, unlike the bill it would have substituted for, would not increase the deficit. The tax cuts for the middle class are offset by increased revenue from corporations that had previously used accounting tricks to avoid paying their fair share of taxes.
From the Experts:
“Under current law, the AMT is destined to become a vice grip on American taxpayers. On one side, the lack of indexation for inflation creates automatic annual AMT tax increases. On the other side, the phase-in of [the 2001] tax cuts will steadily reduce regular income tax burdens over time. Caught in the middle, taxpayers will be squeezed by a tax that most of them were never intended to pay and that is replete with problems…” —Urban-Brookings Tax Policy Center (September 2002)
“Now under the Bush tax cut… there is a one-half trillion dollar increase in alternative minimum taxes. And that money is explicitly being used to finance the reduction in taxes for people at the very top who make millions of dollars…” —David Cay Johnston, author, Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich—and Cheat Everybody Else (March 26, 2004)
Beyond this Bill:
A permanent overhaul of the Alternative Minimum Tax is essential to the middle class. President Bush has suggested abolishing the Alternative Minimum Tax entirely, but this would have a devastating effect on tax revenue while defeating the original purpose of the tax: to make sure corporations and very wealthy individuals can’t completely dodge their federal income taxes. Without the AMT, America's wealthiest individuals could pay no taxes at all, leaving the middle class to shoulder nearly the entire cost of the critical services government provides. Indexing the AMT for inflation, while allowing deductions for dependents and for state and local taxes, would keep the AMT from trapping middle-class taxpayers, but this change too would need to be paid for. The Urban-Brookings Tax Policy Center recommends taxing capital gains and dividends at higher rates than they currently get under the AMT to offset the middle-class AMT cuts. This revenue-neutral approach exempts middle-class taxpayers while retargeting the AMT at high income tax avoiders.
Approximate number of Americans who paid the AMT: 3 million
Percentage of households in 2004 that make between $50,000 and $75,000 that will have to pay the AMT if the system is not reformed by 2010: 37
Income level at which a married couple begins paying the AMT under this amendment: $250,000
Income level at which a married couple begins paying the AMT under the bill that passed: $58,000
Estimated amount the amendment would increase the federal budget deficit, if extended for ten years: $0
Estimated amount the bill that passed would increase the deficit if extended for ten years: $17.8 billion
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