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Dangers of the AMT

Mises Daily: Friday, July 06, 2001 by

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The Infamous Form #6251The government tells you that your taxes are being cut. What you may not have heard is that you may soon be drafted into an entirely separate tax system that receives very little public attention outside publications for tax accountants.

The name of the second tier of tax is the AMT, the alternative minimum tax.  If you work too hard, are too productive, and place your hard-earned savings in assets that are protected against taxation, the government is going to slap you with an AMT of 26 percent (28 percent over $175,000).

The AMT originally was designed to make sure that the extremely wealthy paid their "fair share" of the tax burden. But it was instituted at a time when the highest marginal tax rate was 90 percent, and the tax code provided lots of juicy tax loopholes for wealthy Americans. Tax rates have dropped—but now the AMT, like a stealth bomber, is raising the tax burden on those earning as little as $33,000.

You could be one of the nearly 30 million taxpayers (according to an estimate from the Joint Committee on Taxation) that will have to pay the AMT. That is roughly one in five of all taxpayers. The Bush-league tax cut pushes more taxpayers into the AMT because it lowers regular rates without lowering the AMT rates.

Therefore, just a few itemized deductions and—whammo!—you pay the AMT, and your deductions go right out the window. Say goodbye to deductions for state income taxes, medical expenses, business expenses, and even certain home-equity loans.

With the AMT, you still have to fill out your conventional tax forms, but if you make the minimum, you must refigure your taxes without all your deductions and then pay the "flat tax."  Given that low-income Americans pay little of the total tax burden, we now effectively have a tax system with all the complications of the old tax code alongside the crushing burden of a system designed to stick it to the rich.

Source: Joint Economic CommitteeOur friends in the high-flying tech industry must watch out. Stock options are often given by tech companies to their employees as compensation and incentives. These options do not become taxable income until the stocks are sold. However, with the AMT, the paper gain (the value of the stock) now effectively counts against income.

If you were smart enough to exercise your option when the stock was worth $100, you would have to pay more than $25 in taxes, even if your stock burst with the dot.com bubble and is now only worth the $1/share you paid to exercise your option. If you exercised 100,000 shares, you would owe the government $2.5-plus million and would have no new resources to pay your tax bill.

This is no doubt what led many high-tech employees to rally against the AMT in San Jose, California, the capital of the Silicon Valley. I never thought I’d see a tax protest in that hotbed of green socialism and politically correct hysteria. It just goes to show you that even hard-core statists can eventually see the light if their bank accounts are hit hard enough. It also shows just how bad the AMT can be.

There is some talk about reforming the AMT, largely to quiet the protests from farmers and software engineers. But "reform," as usual, is just an impressive-sounding phase and a means for government to establish new programs, establish more regulations, and get further power over our lives.

The only good alternative is to abolish the AMT and give Americans complete freedom to take advantage of tax loopholes.  If Congress wants to do some good, it should set up an alternative maximum tax at a low rate so that those of us who didn’t want to bother with the IRS rules and regulations wouldn’t have to.

 Or, we could institute a real Alternative Minimum Tax (say, 1 percent) for those of us who would prefer an Alternative Minimum Government.

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Mark Thornton, a senior fellow of the Mises Institute, teaches economics at Columbus State University. mthornton@prodigy.net. See his article archive or his scholarly pieces in the QJAE, the RAE, and the JLS. See also the Joint Economic Committee study on the AMT.