The Alternative Minimum Tax, or AMT, is the provision in the tax code that requires filers to calculate their taxes in two ways: the usual way, with the usual deductions and exemptions; and an alternate way that disallows most exemptions and deductions, but gives one big standard deduction instead. The idea is to be sure that taxpayers can’t pay “too little” in taxes – particularly by taking so many deductions that they pay relatively little tax even though they have relatively high gross income. Brad DeLong is one example — he was AMT’d just this year!
A few days ago, the CBO released a thorough analysis of the increasingly important role the AMT will play in the next few years. Put simply, thanks to the Bush tax cuts, the number of people whose tax calculated in the usual way will be “too low” according to the AMT is set to bloom over the coming few years. The picture below from the CBO report indicates that next year almost 10 million taxpayers will find that their tax cuts will be partially undone by the AMT. Once the Bush tax cuts pass their last year (recall the built-in sunset provisions of most of the tax cuts), taxpayers will see an increase in their taxes calculated the standard way, so the AMT will have less bite. (The left axis shows millions of returns, and the right axis shows AMT receipts in billions of dollars.)
Is this increase in the bite of the AMT over the coming few years a problem? It may be, at least politically. Some people have predicted that when 20 or 30 million taxpayers (many earning less than $100,000 per year) are faced with additional AMT payments, they will rise up against their legislators and demand a repeal of the AMT.
But I wonder – will individuals really be that outraged by the AMT, or will they just see it as another complication on their tax form that they have to deal with, and thus simply shrug their shoulders and jump through yet another IRS hoop? I’m not sure. In addition, repealing (or substantially reducing) the AMT will cost hundreds of billions of dollars in lost revenue to the government, since it would essentially be another tax cut. But even Republicans in Congress seem less inclined to pursue further tax cuts at this point. In fact, keeping the AMT in place could be a convenient way for Congress to try to keep revenues up without actually enacting a tax increase. (Of course, the Bush administration, if they were consistent, would start calling the absence of another tax cut a tax increase…) So I guess I have to express some skepticism that we’ll see a repeal of the AMT any time soon.