AMT Tax Savings Go to High-Income Taxpayers: Now What?

March 8, 2007

Typical reporting on the alternative minimum tax looks like this:

The AMT was created in 1969 to prevent a handful of the uberwealthy from being able to avoid paying federal income taxes, but due to [enter a host of reasons here], tens of millions of middle-class (or “middle-income”) Americans will now be hit by the AMT.

It is also popular to refer to the AMT as a “stealth tax” on the middle class. But is it?

In a report submitted to the House Ways and Means Committee by the Joint Committee on Taxation you’ll find a chart depicting what will happen if the AMT goes unchanged in 2007. It also includes the effects of three popular reforms which, as it has been argued, target “middle-class” taxpayers.

A quick analysis of that data reveals high-income earners receive almost all the tax savings in any of the proposed AMT reforms.

Selected Policy Proposals
Tax Year 2007

Total Tax Savings
(in billions)

Percentage of savings
that goes to the
top 10% of taxpayers

Full Repeal

$73.3

88%

Deduct State and Local Taxes from AMT income

51.6

90

Deduct Personal Exemption from AMT Income

36.6

80

Raise Exemption to $42,500 ($62,550 for joint filers)

43.3

82

Whether or not a portion of those with incomes over $100,000 – the top ten percent of taxpayers – should be considered “middle-class” can certainly be argued, but they are unquestionably not middle-income.

We point this out to show that lawmakers of both parties are now learning that they cannot offer broad tax relief without “disproportionately” benefiting high-income earners since they are the ones who pay the lion’s share of federal taxes. This consequence is a function of our lopsided tax system and will likely occur no matter what AMT reform looks like.

Suspiciously, some in this debate say the middle class falls between $40,000 and $200,000. Now we know why: the vast majority of the savings are in the upper portion of that group. Those with incomes between $40,000 and $100,000 save next to nothing.

It appears six years of talking points about “tax cuts for the rich” will come back to haunt those who now support AMT reform for roughly the same group of taxpayers.

The solution is not to pick our way through quick fixes or bomb one another with class warfare barbs that redefine the “middle class” to suit political ends. The AMT should be addressed. But only full repeal coupled with fundamental tax reform – reducing preferences and treating all income equally – offers a path that will not lead us back here again.


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