James Pethokoukis examines the Democrats attempt to "fix" the problems of the Alternative Minimum Tax in a recent post at his blog at US News. It seems they are busy trying to find a way to "pay" for this long-needed reform. Some of the ideas being explored include: 1) significantly increase the number of tax payers in the top 35% income tax bracket, 2) limit the deductible part of mortgages to the first $1 million, or 3) limit the deductibility of state and local income taxes.
In their analysis of the AMT debate, the Tax Foundation puts it in perspective:
The problem with AMT is that it should be unnecessary in the first place. The reason that AMT was created in 1969 was that a few wealthy individuals were paying nothing in federal income taxes. These wealthy individuals were earning income in ways that were tax-free, and were made tax-free explicitly by Congress. But instead of simply eliminating these loopholes that created this problem in the first place, Congress decided to create a complex parallel tax system that still allowed these loopholes for certain people, but tried to ensure everyone paid some tax amount. But overall, all Congress created was an even bigger mess.Today, however, these loopholes aren't the main reason people are being hit with AMT. The two biggest tax take-away preferences putting people into AMT today are the state and local tax deduction and personal exemptions. The solution to AMT should be fundamental tax reform that addresses the issue in two ways: (1) Most of the preferences that are taken away by AMT should not be in the tax code in the first place, and (2) All income should be treated equally, thereby eliminating any loophole Congress created in the past.
Or better yet, let's scrap the current income tax system and replace it with the Fair Tax or some other politically neutral revenue system. However, that would take away the politicians' favorite way to vie for attention, money and votes. What we have for a tax system right now is a political playground in which elected officials pander to voting blocks and the media.
