Tax Code #2

One of the annoying aspects of the current income tax system in the US is that we actually have two tax codes, not one. Because its provisions are not indexed to inflation, the "Alternative Minimum Tax" (AMT) passed by Congress in the 1970's to keep millionaires from claiming absurd levels of tax deductions has now become the de facto tax code for the upper middle-class.

As you (dear readers) will discover if you do your taxes yourself this year, even when the AMT does not apply to you it remains necessary to execute a convoluted series of calculations, in the margins of your 1040 booklet, to prove that it does not. Even for those who end up in possession of their carefully-hoarded set of deductions, then, it represents a burden of paperwork and record-keeping. For the growing number of taxpayers in the other camp - hit with the AMT - it means losing all benefit of their deductions. These include such long-lauded incentives as home-mortgage interest (encouraging home ownership), property and other state and local taxes (funding public schools, police, fire, and public hospitals), charitable contributions, and college and retirement savings (encouraging fiscal discipline and savings).

The economic and public policy implications are drastic. To the extent that these tax deductions encourage public-minded behavior, those incentives will evaporate as the AMT comes into play. Even those of us not hit by the AMT right now can look ahead a few years (and I have done these calculations) and, seeing the writing on the wall, appreciate that for them the promise of the bread-and-butter tax deductions will soon be quite empty. And this will affect our spending, saving, donating, and investment decisions in the here and now.

The need to reform the AMT - or accept its future status as our primary income tax code and pursue the above public objectives in some alternate fashion - is thus a pressing one. However, despite some half-hearted gestures in this direction from the Congress, no senior official in the current Administration has so much as uttered the words "alternative minimum tax."

Slate magazine's Daniel Gross has one intriguing theory why this might be the case.