South-Western College Publishing - Economics  
Overhauling the Alternative Minimum Tax
Topic Taxes, Spending, and Deficits
Key Words Alternative Minimum Tax and Spending Cuts
Full Article

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Reference ID: A161737576

News Story An effort to exempt millions of citizens from the alternative minimum tax is in its early states of development. One of the hurdles of any overhaul will be replacing the enormous loss of tax revenue that is projected from the tax. Measured in dollars, the loss is much greater than Democratic initiatives to provide money for children's health care, education or any other spending program.

The alternative minimum tax was created in 1969 to prevent millionaires from using loopholes that allowed them to avoid all federal income taxes. Under the alternative calculation, affected taxpayers have to do a second tax calculation without being able to claim certain deductions like those for state and local taxes and child tax credits.

"It's a tax cut to the 23 million American families who have no concept that they're going to get hit with this tax increase," said Representative Rahm Emanuel of Illinois, chairman of the House Democratic Caucus.

Because it is based on income level and it is not adjusted for inflation the tax is expanding at a rapid rate. More and more American taxpayers are reaching the level of income that requires them to make the alternative calculation. Current projections indicate that it can hit families with incomes as low as $50,000 and if left unchanged the tax could affect as many as 23 million households in 2007, a number that is up from only 3.4 million last year.

The basic idea of the Democratic movement is to draft a permanent overhaul of the tax that would effectively exclude anyone who earns less that about $200,000 a year. This would amount to about 97 percent of all taxpayers, leaving only 3 percent to pay the tax.

Discussion Questions:
1. Using information from the article, construct your own description of the alternative minimum tax.
2. Use any source available to find out more about the alternative minimum tax and expand your answer in number 1 above to include your new findings.
Multiple Choice/True False Questions:
1. A major problem with the alternative minimum tax is that it is not indexed for inflation.
  1. True
  2. False
2. The alternative minimum tax was created to keep rich people from paying so much in taxes. .
  1. True
  2. False
Source Edmund Andrews, "Democrats Seek to Lead the Way in Tax Overhaul", The New York Times Online, April 9, 2007.
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