Understanding the AMT (Alternative Minimum Tax)
by Guest Blogger, 4/16/2004
The cost of "fixing" the Alternative Minimum Tax (AMT) is often mentioned as one of the "hidden" tax expenditures that must be addressed.
A primer about the AMT by OMB Watch explains what it is and why it was created. In a nutshell, the AMT was created to keep taxpayers with very high incomes from paying little or no income tax by taking advantage of all the tax preferences that those with high incomes can claim. The AMT applied to less than one percent of all taxpayers before 2000, but since it is not linked to inflation, it is beginning to affect more and more taxpayers. According to a new report by the Congressional Budget Office (CBO), in 2010, if nothing is changed, one in five taxpayers will have AMT liability.
The tax cut bills in 2001 and 2003 temporarily raised the AMT exemptions, but the higher exemptions will run out after 2004. CBO finds that extending the AMT for just FY 2005 would cost $18 billion. Indexing the AMT to inflation would cost $370 billion over ten years. Eliminating the AMT would reduce revenues by nearly $600 billion over the next ten years. The cost of fixing the AMT is high, but it would be politically unpopular to ignore the increasing numbers of taxpayers who will be affected by it. Yet as the administration and Congress continue to promote a permanent extension of the expiring tax cuts, regardless of its huge cost, the additional -- and hardly insignificant -- cost of fixing the AMT is not being included.