Republicans insist that their tax reform is designed to help the middle class and curb the use of tax loopholes. But a little-discussed provision tells a different story. That provision is the repeal of the alternative minimum tax, which would serve the interests of wealthy taxpayers — and tax avoiders.
For taxpayers who itemize, the AMT is a small annual hassle. About 5 million taxpayers end up paying more because of the tax; many others would no doubt welcome a break from the annoyance. But the AMT serves a purpose: It prevents wealthier taxpayers from using deductions and loopholes to shrink their tax liability to little or nothing. It asks tax filers to run their numbers twice — once under the traditional code and once under a separate structure designed to ensure everyone pays a minimum rate. If the latter results in a higher number than the former, the taxpayer must pay extra.
The AMT hits very few households making below $200,000 a year. By contrast, the majority of households earning between $500,000 and $1 million annually pay the AMT. It does not hit the super-wealthy as hard, forcing only a fifth of households making above $1 million a year to pay more, in part because it excludes dividend and interest income, from which the super-wealthy disproportionately benefit. Even so, the public knows of at least one high-profile, high-income AMT payer: Donald Trump, whom the AMT obliged to pay $31 million in 2005, the one year for which the public has seen his summary tax information.
AMT critics argue that, in addition to adding complexity, the tax fails to rein in the most egregious tax sheltering. Yet even if it does not crack down on all tax avoidance, it ensures that a lot of relatively well-off people can't get away with paying little or nothing.
Critics also argue that if Republicans eliminate many of the tax code's deductions and loopholes, and in particular the big deduction for state and local taxes, the AMT would become less needed. But the GOP plan keeps plenty of loopholes in place. And even if that were not the case, the AMT, or a modified version that better targeted the super-rich, would future-proof the tax code against the likelihood that lawmakers over time will restore deductions and loopholes, a safe bet over the coming years and decades. It is unlikely that, when lawmakers add a new deduction here or there, they will have the foresight or discipline to create a new AMT. Not until the resulting tax avoidance becomes egregious — and maybe not even then.
In the name of code simplification, Congress would enable tax-gaming among people who can afford to pay their fair share. Meanwhile, the GOP plan would tax worthier interests, such as university endowments, to raise cash. Like much else in the GOP plan, this is neither fiscally responsible nor just.