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At A Minimum
Subject Taxes
Topic Taxes, Spending, and Deficits
Key Words Fiscal Policy, Inflation, Tax Burden
News Story

Last year's tax cut legislation reduced personal income taxes by $1.35 trillion over 10 years, but did not make any change in the alternative minimum tax (AMT). The AMT was originally enacted to prevent the very wealthy from escaping their income tax obligations. Initially, 155 families were subject to the AMT. This year, approximately 2.6 million taxpayers will be affected and this number will grow to 36 million by 2010. The burden on the AMT will fall on families with incomes between $75,000 to $500,000, and will cancel some of the benefits of the Bush tax cut.

The AMT phases out exemptions for children and some deductions, thereby increasing a taxpayer's tax burden. The primary problem with the AMT is that it is not indexed for inflation. As incomes increase over time, more and more families are subject to this tax.

A study by the Tax Policy Center provides some insight as to the redistributive effects of the AMT. The burden of the minimum tax will shift from the wealthy to the middle class, which was defined in the study to include people earning up to $100,000. For example, by 2010, 97 percent of families with 2 children and income between $75,000 to $100,000 would be forced off the regular income tax system. AMT collections, estimated to be $13 billion this year, will rise to $141.4 billion in 2010.

Families with incomes of less than $50,000 are not affected by the AMT. For families with incomes between $50,000 to $75,000, the AMT reduces the value of the Bush tax cut by 18 cents of every dollar of tax benefit. As incomes rise, the take back increases to 42 cents for incomes between $75,000 to $100,000 and for those in the $100,000 to $500,000 income range, the AMT offset is 71 cents.

Congress and the Administration are aware of the problem; however, they are also aware that solutions are expensive. Repealing the AMT outright could cost as much as $750 billion and would likely require revising other taxes to compensate for the revenue loss.


(Updated October 10, 2002)

Questions
1. Describe how the current federal income tax system operates. What happens to tax rates as income increase?
2. The income tax brackets under the current system are adjusted for inflation. What happens to these brackets over time?
3. What is the alternative minimum tax? Why was it enacted?
4. Explain how the AMT, targeted initially for 155 taxpayers, will impact over 36 million taxpayers by 2010.
Source David Cay Johnston, "Study Says Middle Class to lose Much of Bush Tax Cut's Benefit," The New York Times, September 19, 2002.

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