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Senator Bunning Calls for AMT Repeal

2 min readBy: Gerald Prante

Kentucky Senator Jim Bunning (R), who is also a member of the Senate Finance Committee, has called for a repeal of the alternative minimum taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. (AMT), arguing that it hurts too many “ordinary Americans.” From the Lexington Herald-Leader:

U.S. Sen. Jim Bunning said Tuesday he has introduced legislation to repeal a tax originally targeted at the wealthy but that now affects millions of middle-income people.

Bunning, R-Ky., said he’s co-sponsoring a bill that would do away with the alternative minimum tax.

“It’s really hurting the every day, ordinary American severely,” Bunning told Kentucky reporters during his weekly conference call.

The article closes with this statement from Sen. Bunning:

“There are a lot of us that think we should repeal it and charge it off, not pay for it. In other words, not increase taxes on other people, or taxes on businessess…to pay for a tax that was never intended to affect the taxpayers it is affecting right now.”

Despite what Sen. Bunning or other politicians, both Democrats and Republicans, are saying, AMT is not currently “hurting the every day, ordinary American severely.” In five-to-ten years if nothing is done, that might be true. But even with the 23 million taxpayers who are set to pay AMT this year if nothing is done, virtually all of them are in the upper half of the income spectrum, and most of them are in the top 25 percent. That doesn’t mean nothing should be done to prevent a scheduled increase in taxes from 2006 to 2007 on these people, but politicians should be honest in who they claim to be helping.

Now if taxpayers are rationally forecasting their expected future tax bills and thereby reducing their consumption today, then maybe Sen. Bunning’s statement that this is currently hurting the “every day, ordinary American” would apply. But under that circumstance of rational forecasts, these people may not be helped by Sen. Bunning’s solution, which is to just “charge it off” and let the deficit pay for it. If people are rational and are forward-looking, any deficit financing of a tax cut today is going to be paid largely by those same people down the road or their descendants, whom they supposedly care about, depending upon their expectation of what the future tax distribution would be along with their future individual circumstances. So in other words, they would bear the burden today. This is the famous Ricardian or Barro Equivalence.

Now if the individual does not care (in his utility function) about the tax burden of his descendants, then he would not bear the burden of the deficit. However, that would still make Sen. Bunning’s statement of “not increasing taxes on other people” incorrect, because individuals born 20 years from now are still “other people.”