The alternative minimum tax (AMT) on individuals was created in 1969 – by the Tax Reform Act of 1969 (P.L. 91-172; 12/30/69). This problematic tax is about to reach its 50th anniversary at the end of the year. With the Tax Cuts and Jobs Act of 2017, the corporate AMT was repealed, it is time to repeal the individual AMT and deal with the reasons why it was enacted in a more equitable and logical manner.
Here is the description from the Joint Committee on Taxation’s Summary of H.R. 13270, The Tax Reform Act of 1969 (8/18/69): “Limit on Tax Preferences.—In those cases where tax preferences are not fully subject to tax, provision is made for a minimum tax on individuals having tax preferences in excess of their taxable in- come. The additional tax in this case is determined by adding to the regular income subject to tax, one-half of the tax preferences but only to the extent they exceed the regular income.”
The JCT report lists reasons for and against the minimum tax, as follows.
“Arguments For.—(1) The limit on tax preference is based on the premise that individuals generally should be required to pay tax on at least one-half of their economic income.
(2) The limit on tax preferences has the advantage of making sure that individuals generally pay tax on a substantial part of their 48 income. It, therefore, serves as a second line of defense against the avoidance of income taxes, to back up the first line of defense against such avoidance offered by the remedial provisions in the House bill which limit the scope of specific tax preferences.
(3) The bill corrects the unfair discrimination in present law which favors those taxpayers who derive their income from the ownership of property as contrasted with those who earn their living from wages and salaries.
(4) The present law improperly encourages investment of capital in certain areas for tax consideration rather than good business reasons and violates the principle that taxes should have a neutral impact on economic decisions.
(5) Many individuals with large incomes benefit from tax preferences to the extent that they pay lower average rates of effective tax than many individuals with moderate incomes. This makes a mockery of a tax system based on the ability to pay.
Arguments Against.—(1) This limitation is an imperfect substitute for direct action on the preferential income tax provisions which cause today’s tax injustice. Each particular item of tax preference should be considered on its own merits and should be adjusted accordingly.
(2) Enactment of a limit on tax preference complicates present law by imposing a new income tax system on top of our present system thereby compounding the complexity of the tax laws and adding considerable administrative difficulties to the existing system.
(3) This new approach could become the forerunner of a gross receipts tax on all taxpayers.
(4) The bill raises a constitutional question as to the power of Congress to tax income from State and local government obligations, particularly obligations already outstanding.
(5) The bill is inadequate; the excess of percentage depletion over cost depletion and the excess of intangible drilling and development expenses over the deductions allowed under straight line depreciation should be added to the list of tax preference items subject to the limit on tax preferences.
(6) The limit on tax preferences will discourage charitable gifts.
(7) If Congress has seen fit to provide a specific tax benefit, there is no reason why it should be denied to some merely on the ground that it, in combination with other items, represents a large proportion of that individual’s income.
(8) Since this limit will not affect individuals until the sum of their tax preference income equals one-half of their total income, it will still be possible for some individuals to exclude substantial amounts of tax preference income from tax.”
The Tax Reform Act of 1986 modified the minimum tax making it the alternative minimum tax. The goal remained mostly the same – to be sure high income individuals do not use a combination of deductions, exclusions and credits to reduce their tax liability below a perceived minimum level. While some of these items could have instead been repealed or scaled back, Congress believed each individually had merit.
The Tax Cuts and Jobs Act does cut back on some deductions which causes far fewer individuals to owe AMT. It is debatable whether the best items were cut back (such as with the $10,000 state and local tax deduction cap), with over 150 special provisions in the law, it seems more could be done to reduce tax preferences, particularly those used by a small number of higher income individuals such as the exclusion for tax-exempt interest income, the high mortgage interest deduction and the exclusion for employer-provided health care could be reduced for higher income individuals. These changes (and perhaps others) should be enough to allow repeal of the AMT
After all, shouldn’t there just be one “minimum tax” – your regular tax calculation? [Also see my 2007 op ed on this topic!]
What do you think?