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Alternative Reality

Congress may finally be ready to do something about the fiscal policy nightmare known as the alternative minimum tax, according to today’s New York Times.

The AMT requires some taxpayers to calculate their taxes twice according to two different methods and then pay whichever tax bill is larger. First, taxpayers calculate their taxes using the normal procedure. Then many must also complete an I.R.S. worksheet to determine whether they might have to pay the AMT; the higher their deductions and credits, the more likely they are to be subject to it. To find out for sure, they must complete another I.R.S. form requiring them to add back to their taxable income a long list of so-called tax preferences, including deductions for state and local taxes, charitable contributions, and even the standard deduction and personal exemptions. Then they subtract an AMT exemption, the exact amount of which decreases as income rises. Then they calculate their taxes again – this time using their revised taxable income and different AMT tax rates. Finally, they compare their tax bill under the normal procedure with their liability under the AMT procedure – and pay whichever amount is larger.

The AMT was first imposed in 1969 in response to a Treasury Department study that reported that 155 individuals making more than $200,000 had faced no federal income tax liability in 1967. This was because our complicated tax structure enabled them to escape liability. Outraged, Congress altered the tax structure in order to ensure that all upper-income citizens pay federal income taxes, even when legitimate deductions and credits would otherwise eliminate their liability.

The alternative minimum tax is not indexed for inflation. Because of this, thirty years after its first version was imposed, growing numbers of middle-class families are subject to the alternative minimum tax. If Congress does not wake America’s tax code from this nightmare, millions of Americans making as little as $50,000 will have to pay the AMT this year.

The self-defeating irony of envy-based tax policy is perhaps best illuminated by this one ludicrous phenomenon: A provision seeking to force 155 well-off people in 1970 to pay income taxes may cause millions of middle-class families to pay higher taxes in 2007.