The AMT: Out of Control

The practice of requiring well-to-do Americans to pay a minimum tax was developed more than three decades ago. In January 1969, then-Treasury Secretary Joseph W. Barr informed Congress that 155 individual taxpayers with incomes exceeding $200,000 had paid no federal income tax in 1966. The news set off a political firestorm. Members of Congress were deluged with more constituent letters about the untaxed 155 in 1969 than about the Vietnam War. Later that year, Congress created a minimum tax to prevent wealthy individuals from taking undue advantage of tax laws to reduce or eliminate their federal income tax liability.

Historically, both the original minimum tax and the individual alternative minimum tax (AMT) that replaced it applied to only a small minority of highincome households. But under current law, this “class tax” will soon be a “mass tax.” Current projections show the number of AMT taxpayers skyrocketing from 1 million in 1999 to 36 million in 2010. Without reform, virtually all upper-middle-class families with two or more children will be paying the AMT by decade’s end. This expansion will occur because the AMT is not indexed for inflation and because the 2001 tax cut reduced the regular income tax without making long-term cuts to the AMT.

The steep growth in the AMT would not justify alarm if it made taxation more fair, efficient, and simple. But the AMT’s record on fairness and efficiency is mixed, and its structure is notoriously complex. For these reasons, the AMT must be reformed, if not eliminated, even though fixing the AMT will be expensive. Indeed, by the decade’s end, repealing the AMT will cost the Treasury more than repealing the regular income tax.

How did a tax originally designed to target 155 taxpayers grow so dramatically? What are the economics of the AMT? And what are the options for reform?