What's Going on with the Alternative Minimum Tax?

There's nothing like finding out that you might be paying more taxes — a lot more — to focus your attention. So I took notice when I read about Treasury Secretary Henry Paulson's call to Congress to fix a part of the tax code called the alternative minimum tax, like, right now. If a change isn't made soon, millions of middle-class Americans (about 21 million, in fact) could end up facing an average increase of $2,000 — falling victim to a rule originally designed to get rich people who found a way around paying taxes to pony up.

Well, I don't know about you, but I ain't rich.

I know next to nothing about taxes, especially the AMT. (And I am not alone here, as is evident in this piece by Andrea Seabrook from March.) So I turned to NPR's Adam Davidson, who knows a lot about trade, business and finance. One thing I wanted to know was why the AMT wasn't just tied to inflation, which would seem to solve this problem. (As incomes rise over time, more and more people are bumping over the threshold that qualifies them for the AMT.)

The answer? Well, the AMT makes little economic sense, Adam says, but it makes lots of sense politically. It was created at a time when many in Congress felt "rich people" were not paying enough (or any) taxes. So the AMT was created to ensure everyone paid something. But instead of thoughtful study and research, Congress kind of, well, winged it.

"It was like they used made-up numbers that seemed like, 'Wow, that's what really rich people make,'" Adam said.

If Congress really had to have this kind of tax, Adam says most economists would favor something that used, say, 200 percent of the median household income as a marker for the start of the AMT.

So if the tax has been pegged to arbitrary numbers all this time, why hasn't it been changed yet? Adam points to "pay-as-you-go" rules in Congress that prevent taxes from being cut without making up the lost revenue somewhere else. Few, if any, representatives have found it important to fight for a tax change that could come at the expense of pet projects.

But tax increases don't make voters happy either, so Congress is looking to fix the problem — at least for a year. Of course, as USA Today reports, members are struggling to decide how to pay the $50 billion price tag. Many Republicans are pushing to waive the pay-as-you-go rules, saying taxes aren't being cut, just not raised.

12:14 PM ET | 10-24-2007 | permalink