The Alternative Minimum Tax and Misleading Baselines

Much of the discussion of the Alternative Minimum Tax (AMT) is unnecessarily confusing. It is often reported that is expensive to "fix" the AMT. The real problem is that baseline budget projections assume tax revenues that no one expects will ever be collected.

The basic story on the AMT is that it is a catchall tax. It tells taxpayers above an income cutoff that they must pay the tax they owe under the ordinary tax code or (crudely) X percent of their income, whichever is higher. The big problem with the AMT is that the law does not permanently index the cutoff point to inflation, like the other tax brackets in the tax code. This means that more people will fall below the cutoff every year, unless Congress votes to raise the cutoff. Congress has voted to raise the cutoff temporarily for around a decade.

Of course, if Congress does not raise the cutoff, then millions of middle income families would be hit by the AMT. No one ever expects that these people will be paying the higher tax rate that the AMT would imply. The gap is even larger due to President Bush's tax cut, since that lowers the baseline tax rate -- it effectively means that millions of people will have been promised a tax cut that they would never receive because they would be nailed by the AMT.

Anyhow, the obvious problem in this story is counting the revenue from not indexing the AMT in the baseline, even though no one expects that the government would ever receive it. The Congressional Budget Office (CBO) is obligated to construct their baseline in this way, since they must assume current law holds, which means that there is no annual fix to the AMT. But, reporters could take advantage of the information provided by CBO (Table 1-5) and report the deficit under the assumption that Congress does what it has always done and fixes the AMT, at least temporarily. This would be a more honest way of reporting on the budget.

--Dean Baker