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AMT: Outdated and Ready for Reform

by Mytheos Holt, published

The economic scholar Ronald Coase once characterized the market as "islands of butter in a pail of buttermilk." Similarly, President Obama's stimulus package could be characterized as islands of sense in an ocean of politics-as-usual. And one of those islands happens, fortunately, to be the Congress's efforts to remove $70 billion from the alternative minimum tax, a cruelly designed trap for the successful, with the express purpose of maximizing bracket creep while minimizing upward mobility.

If President Obama's rhetoric about the middle class were more than rhetoric, than this is one portion of the bill upon which he ought not to compromise, especially when one of the largest states in the union needs this tax reformed so drastically.

California's economic problems, and the already crushing tax burden which will be added after the passage of Governor Schwarzenegger's "compromise" with the Democrats are reason enough for taxes to be cut, but the Alternative Minimum Tax (AMT) is an especially juicy, ripe subject for cutting.

It is a rhetorical winner for the anti-State brigades if ever there were one, especially because the AMT in its present form puts the lie to the Democratic obsession with "helping out the little guy" for several scandalously blatant reasons.

But first, what is the Alternative Minimum Tax? To put it bluntly, it's a tax intended to make sure that people still pay at least some taxes, and hails from an earlier era when tax shelters were as plentiful as parasitic social workers. According to the AMT, if someone is paying below a certain amount of taxation because of tax deductions etc, they become subject to the AMT, which is currently set above 20 percent.

Now, one might ask, what's wrong with making sure that people pay their fair share? Alan Viard, a scholar at the American Enterprise Institute, has suggested several things already in his testimony before Congress last year. In the first place, Viard points out, the AMT is not indexed to inflation, meaning that any decrease in the value of the dollar will go unnoticed in the tax's implementation. This wouldn't be a problem in the short term, but unfortunately, the AMT is not a short-term policy. It has existed since 1969 and as such, the burden of its implementation falls not on the malevolent, heartless, grasping worms who make $250,000 or more, but rather on people who make as little $30,000-$50,000 dollars, a sum so small that some colleges would automatically give their children full scholarships!

Of course, this sharply regressive outcome can't be expected to inspire genuine bipartisanship, as several Democrats have already begun pointing the AMT as pandering to the rich and powerful. One particularly priceless quote comes from South Carolina Representative Jim Clyburn, who argued that "you can't get people back to work using tax cuts." Dear, dear, someone hasn't been paying attention to the presidential talking points about discredited policy -- I suppose Mr. Clyburn doesn't know the Laffer Curve exists either.

However, for the sake of argument, let's ignore the regressive nature of the tax and entertain his conjecture: even if the tax hits lower income earners harder, at least it gets people back to work, right? Right?

Wrong. Consider: if a worker knows that, once he reaches an income level even above bare subsistence, he will be taxed out of his wits, then that worker has absolutely no incentive to pursue even the most basic forms of self-advancement. In fact, that worker might have an incentive to avoid getting into a job where he could make something above the dreaded $30,000 mark altogether! Hardly a way to get people "back to work."

Which is why we must continue to pursue the reduction in this absolutely inexcusable tax, which in turn will hopefully be the first step toward eliminating it altogether. If that happens, then maybe there will be some cause for the presidential rhetoric of "hope and change."

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