Senator Baucus, Chair of the Senate Finance Committee, said this week that he would move a one-year patch on the alternative minimum tax (AMT) rather than attempt any larger reform of the provision. Today, House Ways and Means Chair Rangel concurred, saying that he will introduce a stopgap measure to prevent the extension of the AMT further down the distribution this year, and introduce a more comprehensive tax bill that would repeal the AMT that would likely not be acted on this year.
While the reach of the AMT into the middle class extends each year because of the interaction of lack of indexation and the upward creep of incomes, the most significant numbers impacted are upper middle income families with incomes in the $200,000 to $500,000 range. (The highest income families do not pay AMT since their regular tax liability is higher because they are in the highest rate bracket, even though the regular tax base is less broad than the AMT base.)
The cost of repeal is a major consideration. Repealing the AMT will result in billions of dollars of lost revenues to the fisc. Repealing the AMT and making the Bush tax cuts permanent could have strongly negative budgetary consequences.
Both Baucus and Rangel have suggested that action on the carried interest issue--the ability of hedge fund and private equity fund managers to earn what seems clearly to be compensation income yet have it transformed into income taxed at preferential capital gains rate by the alchemy of the current treatment of a partnership "profits" interest-- may come into play in connection with the AMT as a possible revenue raiser, though most likely only in a bigger package to be considered next year. Rangel has left an opening for making the carried interest change in connection with this year's AMT patch, according to BNA's Oct. 17 Daily Tax Report (RealTime).
Finally, the same BNA release notes that Senator Grassley, ranking minority member on the Senate Finance Committee, said today that a compromise might be to index the AMT for inflation so as to eliminate the downward creep, while at the same time making some adjustments to limit the AMT to the "superrich". That may be the start towards a workable solution. I have urged that the AMT be indexed for inflation, starting with a suitable exemption level that would protect ordinary middle class taxpayers from the AMT. A reasonable amount for the exemption level would be around $100,000 (twice the median income) or at most perhaps as much as $150,000 (three times the median income). In that way, the AMT would apply only to the upper-middle class and above--those at the top of the income distribution. I'd also add the capital gains preference to AMT adjustments, so that the huge benefit of the capital gains rate is undone for taxpayers in the upper brackets. My version would include more taxpayers and more items within the AMT's reach than Senator Grassley's (and cost less to enact), but both would accomplish a core goal of exempting ordinary taxpayers.
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