Trump’s Reverse Robin Hood “Tax Reform” — The Alternative Minimum Tax
On September 27, 2017, the Trump Administration released its 9-page tax reform plan. The plan, short on many details, focuses on four principles that, in theory, drive the ways in which the current tax code would change. This is the first in a series of articles that will dissect each of the major changes and the anticipated effects it will likely have.
The Alternative Minimum Tax, or AMT for short, has long been the bane of select taxpayers. On its surface, it defies the concept of simplicity because it functions as a parallel tax system. Originally designed to ensure that higher-income taxpayers did not shield too much of their income from taxes, it has grown year over year to ensnare a larger number of people. Two tax systems running side by side, with the AMT making sure you pay the higher of two tax rates. Sounds insidious, right?
The Administration wants to repeal the AMT, using the below rationale:
The Joint Committee on Taxation (JCT) is a congressional committee established in 1926. It, like the oft-maligned Congressional Budget Office (CBO), is nonpartisan. The Internal Revenue Service (IRS) Taxpayer Advocate is Nina Olson, appointed in 2001 and still serving. She has advocated for the repeal of the AMT for more than a decade. When I look at the above argument, it is all about simplification and target audience. The AMT makes the tax code more complex (bad!) and does not accurately target the wealthiest taxpayers (also bad!). Let’s take a look at that more closely.
The Tax Policy Center estimates that, in 2018, around two-thirds of those with annual pretax income of between $500,000 and $1,000,000 will pay the AMT. Almost 30% of those who earn between $200,000 and $500,000 a year will pay the AMT, as will around 19% of those who earn more than $1,000,000 a year. Slightly more than 2% of taxpayers who earn between $75,000 and $200,000 annually are subject to the whims of the AMT. That does not sound like a tax cut designed for lower and middle class income individuals and families. In fact, it is not. U.S. Census data from 2016 shows that only 7% of U.S. households earned $200,000 or more. Therefore, repealing the AMT mostly benefits that 7% (but really it is less than that — see below for more), while the remaining 93% see little or no tangible benefit. If the goal of AMT repeal is to make it fair for the people earning less than $200,000 a year, then fix that piece of it. Why give up revenue on high-earning individuals?
How much revenue are we talking about? According to the Tax Policy Center, “ the AMT is expected to generate $37.7 billion, or about 2.5 percent of individual income tax revenue” in 2017. Nearly $38 billion from 5.2 million taxpayers. In 2014, the latest year for which IRS data is available, there were almost 140 million taxpayers. In other words, perhaps around 4% of the taxpayer base overall is pays the AMT. Why is this 4% so important to the Administration?
Thanks to MSNBC and Rachel Maddow’s analysis of Donald Trump’s 2005 U.S. income tax returns, we know at least one person who will benefit big league. In 2005, he paid more than $31 million in AMT. The AMT represented slightly more than 80% of his tax liability that year. If the AMT did not exist, Trump’s tax liability that year could have been as low as 5% (roughly $7 million in taxes on income of $150 million). Instead, because of the AMT, his tax liability was closer to 25%. To put that into further context, the average tax rate in 2005 was 13.6%, according to the IRS, with average income of around $76,000. The AMT forced Trump to effectively pay two times that tax rate on income that nearly 2,000 times higher than the U.S. average. Really progressive tax system we have here, folks! Not.
In summary, the AMT is not perfect. It requires congressional fixes on a regular basis to make it work the way it was originally intended. Despite those periodic legislative patches, it snags more people every year. Particularly hard hit are those who live in high tax states and who regularly deduct local and state taxes when they itemize. Yet, since the Trump tax framework also plans to eliminate most itemized deductions, including the state and local tax deduction, this proposed repeal of the AMT makes even less sense. If there are no more deductions for state and local taxes, the AMT will not ensnare as many upper middle income people.
The AMT repeal, therefore, only makes sense in the context that it is a government-funded handout to the wealthiest among us, contributing to a ballooning deficit when we can least afford it. Who really believes that the current 4% of AMT taxpayers would actually direct some or all of that savings to the remaining 96% were the AMT to be nixed? Trump’s philanthropic largesse or lack thereof is perhaps a good barometer, which the The New Yorker estimates at about five cents of charitable giving for every $100 in income. Maybe if he had only paid a 4% tax rate in 2005 he might have been more generous.
