Rangel & the AMT

One of the most daunting issues facing American taxpayers is the alternative minimum tax. This piece of the American Internal Revenue Code came about in 1969, when Congress heard testimony that 155 wealthy individuals paid little or no tax in 1966 (the average inflation-indexed income of the 155 individuals would be near 1 million dollars today) Instead of fixing the problems in the regular tax code, Congress introduced a new tax system based on adding certain regular income tax adjustments or deductions back into taxable income. (extremely vague description) If the AMT is lower than the regular amount of tax than no AMT is owed otherwise the difference is added onto to regular amount of tax and the taxpayer pays AMT in full.

This has been one of the most poorly crafted pieces of the Internal Revenue Code. For starters it was not adjusted for inflation so therefore it is affecting more and more of the middle class taxpayers, it disallows deductions for state and local income taxes creating a double taxation effect in some cases, and many other serious problems.

I have commented on Charles Rangel, and his expressed desire to repeal the AMT. In a recent news letter from the National Association of Enrolled Agents it appears that serious AMT reform is likely not going to be a menu item this year with leaders from the House and the Senate both introducing additional 1 year inflation patches. However the house is still working on a massive reform package that will, among other things, include an elimination of the Alternative Minimum Tax. Some of his other initiatives include, expending the child tax credit, the earned income credit, and the standard deduction, all tax provisions that are beneficial to middle and lower income taxpaying families. The article also mentioned nearly 1 trillion dollars in tax increasing offsets. I would assume that this would include increasing the capital gains rates back to their pre-Bush levels. This would be a bad move, taxing savings and investments heavily is not the right idea, as we enter a phase in American history where retirees will outnumber workers by a significant margin, and our Social Security system is still in peril of being broke before this era is complete, we need to keep as much savings and investment income in the hands of American taxpayers as possible.

Now the AMT also adds another element to the voucher issue. It was brought up at the end of my last post that it may be better if we support school choice to get the law enacted now and have the legislature fix the flaws in the legislation later. For me though the AMT is like a bright red flag against this kind of approach, Jeremy from Jeremy's Jeremiad eloquently stated the problem in earlier comment on this blog:

"I'd love to be able to buy the idea you guys have proposed that there is a possibility that the voucher program could be made to disappear if it is a flop. The problem is that I can't think of another example of an entitlement program that was easily revoked after government started handing the money out...even when the vast majority of beneficiaries were wealthy types who didn't need the entitlement in the first place.

This plan is a great example of a possible perfect storm of government waste that can't be undone. If things go poorly and only 2-3% of public school students use the vouchers do you really think Republicans will agree the experiment they've invested so much political capital in is a failure? They'll let it go another 10 years. By then all the rich kids who never would have been in public schools in the first place will be receiving vouchers (and they likely won't be the small $500 subsidies the program currently hands out to wealthy people...some legislators are already apologizing for how small those vouchers are). Will the Republican legislature be able to count on many of its rich donors to go along with revoking the state entitlement that helps pay for their kids private schools?"

That is what I finally have seen as the end result of the HB 148 and 174 voucher plan. If bad law is enacted, it becomes institutionalized and entrenched. In my experience government may see the error of past legislation, but usually it isn't until there have been years of waste and misappropriation. Even after lawmakers see the error it is difficult to remove the error because of constituents who now view the "experiment" as an entitlement.

I would rather (however unlikely this may be) that lawmakers revisit the proposal, find a means of making vouchers a truly cost-efficient means of providing school choice to taxpayers while creating savings for public schools.