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Treasury Urges Reform of Alternative Minimum Tax

The alternative minimum tax (search) should be repealed this year, the Republican chairman of the Senate Finance Committee said Monday, even as the Treasury Department urged lawmakers to revise it as part of a complete tax overhaul.

The alternative minimum tax takes aim at wealthy tax dodgers, but it has increasingly stretched its taxing tentacles into the middle class. Temporary patches have kept it from affecting millions of additional families in recent years.

Charles Grassley and three other senators on the tax-writing committee introduced a bill this week to repeal the tax, at a cost of $611 billion over the next decade. Grassley said he wouldn't wait for Congress to act on recommendations to be issued this summer by a presidential commission studying options to rewrite tax laws.

"It's not only a tax that's going to ruin the middle class, that was never to be taxed in the first place, it was never supposed to bring one penny into the Treasury," said Grassley, R-Iowa. "So what's the big deal about doing away with it?"

Grassley said he expected to get widespread support in the Senate.

"This should get Democratic support right off the bat because all these people that are being taxed are in their blue states," he said.

Robert J. Carroll, deputy assistant Treasury secretary for tax analysis, told the Senate Finance Subcommittee on Taxation that the alternative minimum tax is too costly to simply repeal.

"It is both inevitable and timely that the long-term solution to the AMT problem will be through broad reform of the income tax," he said. "Inevitable, because budgetary constraints preclude simple AMT repeal. Timely, because our overly complicated tax system ... is in dire need of reform."

The cost of repealing the alternative minimum tax goes up -- to more than $800 billion -- if lawmakers extend the tax cuts passed during the Bush administration past their expiration date at the end of the decade.

That cost estimate also reveals how swiftly the tax is expected to expand if not changed. The Treasury Department estimated that the alternative minimum tax will cover more than 50 million taxpayers in 2015. Next year, if a temporary solution lapses, more than 20 million taxpayers can expect to pay.

Carroll told lawmakers that the tax no longer fulfills its original mission to ensure that wealthy taxpayers pay some taxes. Despite the AMT, several thousand high-income taxpayers escape taxation every year, he said.

Congress implemented the alternative minimum tax in 1969 after discovering that 155 wealthy people paid not a penny in tax. Lawmakers, over the years, shut down many of the tax shelters and other devices that those wealthy individuals used to avoid taxation.

Now, the AMT has spread into places that lawmakers never expected, affecting taxpayers with several children or taxpayers who live in states with high income and property taxes. Those families see their paperwork increase, their taxes go up and their tax breaks disappear.

Sen. Max Baucus, the top Democrat on the Senate Finance Committee, compared the tax to a young Jedi knight lured to the dark side to become evildoer Darth Vader in the Star Wars movies.

Both "started off with great intentions, but eventually they went astray," said Baucus of Montana. "And now we have the Darth Vader of the tax code bearing down on millions of unsuspecting families."