Millionaires Would Love to Be in AMT

July 26, 2007

Throughout the entire debate on the alternative minimum tax, politicians have taken aim at the fact that most millionaires don’t pay AMT, as if this is some sort of injustice. Such rhetoric, however, is merely a function of the politicians’ own misunderstanding of the tax system, or they may be intentionally trying to deceive the public by not giving them the full picture.

The reason millionaires don’t pay AMT is because their regular tax liabilities are so high that they drastically exceed their AMT liabilities. The top AMT rate is 28 percent, but for millionaires, much of their income is taxed at the 35 percent regular rate. Even if we doubled that top rate from 35 to 70 percent, millionaires would still not be paying AMT. In fact, even fewer would be paying AMT.

But if we want to put millionaires into AMT, we could – by cutting the 35 percent regular tax rate to 0. Then almost everyone making over a million dollars would have to pay the AMT. But they would get a $23 billion tax cut in the process, which is about a $70,000 tax cut per tax return. But hey, at least things would be fair and the millionaires would be paying AMT. In fact, the average AMT for millionaire returns would increase by $570,000.

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