The approaching fiscal cliff has primarily been thought of in terms of a hike in taxes and a severe spending cut that the Congressional Budget Office (CBO) says would throw the US economy right back into recession.
But what’s not talked about as much is the effect of the fiscal cliff on the alternative minimum tax (AMT) tax. Or, rather, those who pay it.
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The AMT was created in 1969, the same year a man walked on the moon. Reportedly, 155 well-to-do people making more than $200,000 per year were paying no tax at all. To keep that from continuing, the AMT tax was created.
The theory was a good one but it has never been an easy one to execute. Along with other tax reforms in 1986, the AMT became a sort of parallel system, but one that did not allow deductions. Taxpayers had to assess their liability for each and then pay whichever yielded the highest liability.
So, enter the fiscal cliff. If Congress doesn’t do anything and current tax laws expire, the AMT will transform into every taxpayer’s nightmare. It will jump from affecting only 4.4 million people to affecting 32.9 million.
That means the tax will hit the middle class with a wallop. The AMT is not indexed to inflation and the only reason it hasn’t spread to the masses so far is that Congress keeps passing patches to limit its reach.
Congress could pass another patch without having to address the other issues at hand, including the renewal of farm programs and helping the US Postal Service pay for retiree health care.
This year, the AMT issue is being lumped right in there with the other fiscal cliff issues.
The simplest thing might be to do away with the current income tax system and let the AMT expand, effectively creating a 28% flat tax.
Congress doesn’t seem to know simple and multiple efforts to pass a flat tax in the past have failed. On the other hand, the AMT is a tax specifically designed to affect the wealthy.
And that might help to assuage the current prejudice against the wealthy. It might even help diffuse the current polarity between rich and poor. Any opinions out there you'd like to share?