Alternative Minimum Tax, AMT, reform, consumption
The alternative minimum tax (AMT) has recently become a cause celebre because many more taxpayers are now subject to it than originally envisioned at the time of its enactment in 1969 (and, indeed, than after any of its several modifications over the years). As such, it has been discussed and criticized in the press and by tax professionals and academics, most recently in Tax Notes by four former Internal Revenue Service (Service) commissioners who advocated scrapping it entirely. The criticism has questioned the wisdom of the inadvertent expansion of the AMT in coverage, that is, the number of taxpayers who will be subject to it. This expansion of the AMT’s coverage has largely resulted from the reduction in rates of the regular tax without a concomitant reduction in rates of the AMT. The focus of the recent discussion of the AMT, however, has been on a glass half empty instead of on a glass half full. The recently advocated “reform” of simply scrapping the AMT would leave the regular tax, with all of its defects, intact, without mitigation by the AMT. On the other hand, merely modifying the AMT would leave us with a dual system, with all of its needless complication. These are not the only choices, however. A fairer and better income tax could be achieved by eliminating the dual system and incorporating the core principles of the current AMT into the income tax. The current tax system is not a pure income tax but rather is more accurately characterized as a hybrid of an income tax and a consumption tax. Under this view, a fairer and better tax system also can be achieved by eliminating the dual system but incorporating most but not all of the core principles of the current AMT into the basic tax system. Specifically, the business and investment provisions of the current AMT would be abandoned. This idea is explored in detail in this article.