Why not just drop the AMT, and forget how to "pay for it"?

The Alternative Minimum Tax was designed decades ago to prevent a handful of rich people from getting away with zero taxes.  Congress unsurprisingly "forgot" to index it for inflation; as a result, millions of today's non-rich people are getting unfairly snagged by the AMT. 

The tax code's complexity, even back in the '70s, had created loopholes permitting those few rich people to get away with zero taxes.  The solution, as usual, was to make the tax code just a little more complex, instead of simplifying the tax code to eliminate the loopholes.  Politicians haven't changed much, in other words. 

The question everybody is asking today:

"When we eliminate the unfair AMT, how should we pay for it?" 

That's the question Charlie Rangel and Jim McCrery (both Congressmen on the Ways and Means Committee) kept getting on Larry Kudlow's show yesterday.  Think about it: If we dropped the AMT, how would you "pay for it"?

Sorry, that was a trick question.  The key question—the one nobody is asking—is this:

Who cares whether we "pay for it"?  Why not just drop the AMT, PERIOD?

Just for fun, ask your friends to ponder that one over the weekend. 

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End note:

I can almost guarantee what your friends' reflex answer will be: It will contain the word "deficit" or "debt" or both.  The obvious followup question should then be, "Why, what's wrong with having a deficit?"  Before accepting any answers to that question, send them to the following links:

• The Debt Doomsday myth
• "Fiscal responsibility" defined

Comments

[JBL]

The best twist I've heard on the AMT question is: Why not keep the AMT and drop the regular income tax?

If you want to get rid of the AMT, and someone asks how to pay for it, I think the answer is "Pay for what? How much money does the AMT raise over the regular income tax, what is the cost of compliance, and what is the long-term fiscal impact of just eliminating both sides of that equation?"

If it turns out that we need to pay for it at all, I would guess that most if not all of the people who pay AMT would be happy with a revenue-neutral decrease in other deductions. Many would even take an increase in the overall tax rate, if that were necessary (though I don't see why it would be).

[JorgXMcKie]

I expect to be drinking beer and barbecuing with friends this weekend. Those who aren't smart enough to understand this stuff are smart enough not to argue about it. (Except for the Marxist, who basically is just against anything non it the Marxist canon.)

[PseudoNoise]

I had the honor of getting hit by it once. As a tax goes, AMT is much more a flat tax than the normal schedule.

It's just the way it's calculated is totally bizarre ("start from your income tax, then subtract out the differences between normal & AMT bracket-by-bracket").

It's basically a 26-28% tax rate with a large deductible -- at least, last time I looked.

[Matt]

Taxes are such an interesting issue. We all know that liberals would tax us at 100% of earning if they could, which is ridiculous. On the other side, conservatives would have us believe that lower taxes are always better, yet a tax rate of 1% would simply not generate enough revenue. Thus, we must find a balance between keeping taxes high enough to maintain government revenues, but also low enough to permit solid and consistent economic growth. I do not know what that tax rate would be, but let's say it is 20% of GDP, extracted from taxpayers through whatever income and property taxes seemed fair. I would like to see a system in place where we all know that 20% is the optimum rate, and during bad economic times we bump it down to 18%. In good times, ramp it up to 22% to pay off the excess debt created during meager times. Not that debt is bad. The government should maintain a debt level at say 60% of GDP, and when it goes up to 63%, pay it back down to 60.

The point is that adding debt IS bad if you already have too much as a percent of GDP. Further, lowering or eliminating taxes reaches a state of diminishing returns if they are already low. Defining the optimum tax rate and debt levels is too often left up to politics, and not a respectable mathematical model to optimize economic growth and government revenues for the near and short term.

OK, sorry for the long comment, maybe I should start a blog or something--

[kevin]

You know, it's an inherent conflict of interest when the very body that approves the budget and controls the purse strings -- and therefore depends directly on the revenue -- is also the body that sets that tax rates and policies. Even crack dealers know not to get hooked on the stuff.

We need a high-falutin' legal theory about this.

[Bob]

Why in heavens' name would Kudlow put Rangel on? Sheesh! Congressman Rangel is the epitome of a liberal, bloviating, incompetent pol.

But he's in good company with the other imcompetent pols.

God save the nation.

[rufus]

I think it's worth noting that with all the myriad of tax schemes, and brackets that Congress has come up with they've never managed to collect more than 21%, more or less, of the GDP in taxes. This, despite tax brackets as high as 90%. Jes sayin.