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Alternative Minimum Tax unfairly punishes California taxpayers

by Mytheos Holt, published

It is generally agreed upon, even by the staunchest proponents of progressive taxation, that expecting people to pay more than they can is an injustice which ought to be remedied in whatever manner possible. Yet, it is precisely this vision of progressivity which gave rise to one of the most steeply regressive policies in the country – a policy which afflicts states just as deleteriously as it does individuals, and sometimes with even more regressive effects. That tax is the infamous Alternative Minimum Tax (AMT), a tax originally created with the intent of forcing wealthy individuals to pay a certain amount of taxes, even if they could otherwise negate their required contributions with deductions.

However, this supposedly progressive intent has been all but completely eclipsed by the tax’s outdated enforcement mechanisms. And, as characterized by some, the AMT is still a “cruelly designed trap for the successful.” Moreover, MSN Money has already detailed a particularly heartbreaking instance of this trap being sprung. Author Jeff Schnepper explains:

“Marile Robinson, 52, had just bought her dream home a few years ago when her accountant gave her a nasty shock: She owed an unexpected $290,000 in taxes…it turns out that Robinson, like more and more middle-income folks each year, got slapped with the alternative minimum tax, a tax system thats separate from the regular income tax and comes with its own rates and rules. By 2010, the Internal Revenue Service estimates, more than 35 million taxpayers will be subject to the tax.”

It’s worth noting, as Schnepper explains elsewhere, that Ms. Robinson was slapped with this massive tax on only a $75,000 salary – hardly the sort of supposedly massive, self-indulgent salary targeted by the spirit of the AMT. And what is worse is that, if the effect of the tax on individuals is invidious, the effect which such a poorly enforced tax could have on States (especially ones with large concentrations of wealth like California) is nothing short of terrifying. Ironically, these effects are only more terrifying if you accept the premise which AMT-advocates subscribe to in the first place – that higher taxation is necessarily a successful manner by which to raise revenue.

The reason for this is simple – as large, economically progressive States such as New York and California have been learning rather brutally over the past year, setting taxation rates is a balancing act between how much revenue you think you need and how much you think you can demand from wealthy taxpayers before they leave. Unfortunately, a large amount of this calculus gets taken out of the hands of states by the federal government, which demands a commanding sum of most taxpayers’ money, to say nothing of the wealthy, who pay over a third of their income already.

At this point, the states have to decide not just how much money they can afford to demand, but how much they can afford to demand which the Federal Government hasn’t already claimed. At the point where a federal juggernaut like the AMT exists to swallow massive amounts of both wealthy and (in some cases) middle-class taxpayers’ money, highly taxed states are likely to lose huge amounts of their middle-class business constituencies. This is less of a problem for California, given the fact that there will always be high income-earners who come from the entrenched film industry in Hollywood, but at the point where Massachusetts and New York have begun making inroads on the film industry, to rely solely on the silver screen is an unwise move for the golden state.

In other words, the AMT not only deprives people of money they can’t afford to pay – it also deprives states of revenue they arguably need more than the federal juggernaut, which has demonstrated repeatedly that it has no problem with running a deficit. At the point where the federal government demands more money so it can spend more and states demand more so they can break even, this seems like a clear instance of scrambled fiscal priorities.

So, having demonstrated the danger of the AMT, only one question remains – what to do about it? Doubtlessly, there are arguments to be made that reforming the policy is the way to go, if one assumes that tax policy should serve an egalitarian purpose, rather than simply serve as a revenue raiser. However, this is a problematic philosophical assumption which is by no means indisputable, and certainly not politically popular.

Every fiscally sane voter should consider repealing the policy to be a high priority. Such an intent carries bipartisan support, given that Democratic Sen. Max Baucus and Republican Sen. Charles Grassley proposed a similar idea in 2007, which mysteriously evaporated. Hopefully, the AMT will not survive a similar challenge the second time around.

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