Congress Fiddles While Middle America Burns: Amending the Amt (And Regular Tax)

Abstract

The Emperor Nero is said to have fiddled away while Rome burned, oblivious to the damage he himself had caused. The Empire never truly recovered. Will this generation's grandchildren look back at the current Congress and condemn it for similar frivolity? It may well be claimed that Congress has frittered away the next generation's future by passing tax cuts providing excessive benefits to the wealthy while letting the alternative minimum tax fall more and more broadly. This article argues that Congress could restore some modicum of tax sanity for ordinary Americans by a combination of changes to the regular and alternative minimum tax.
The current alternative minimum tax (referred to herein as the AMT) is a "back-up" tax system with flatter rate brackets and a broader tax base than the regular income tax. The base (called "alternative minimum taxable income") is essentially derived from the regular income tax base by making certain "adjustments" and adding back in certain "preference" items that are disallowed for AMT purposes. These adjustments and disallowed tax preferences (both generally referred to herein as "AMT preferences") include reduction in the amount of accelerated depreciation that may be taken into account for AMT purposes, disallowance of the deduction for interest on certain home equity loans, and required inclusion of otherwise excluded taxexempt interest on certain private activity bonds. The first $175,000 of income included in the AMT base in excess of a specified AMT exemption amount is taxed under the AMT at a rate of 26%. Excess alternative minimum taxable income above that $175,000 bracket is taxed at 28%. Capital gains, however, still enjoy preferential rates as under the regular tax.