What Is the Alternative Minimum Tax?:
The Alternative Minimum Tax was created in 1969 when it was discovered that many wealthy
individuals paid no taxes at all, because they were using tax deductions not available to the average
worker. In response, the Alternative Minimum Tax was created to factor back in those deductions and
apply a higher tax rate if the resultant estimated income reaches a certain level.
How Does the Alternative Minimum Tax Affect the U.S. Economy?:
The Alternative Minimum Tax will provide an additional $600 billion in revenue over the next 10 years. It has usually only been paid by the top 1% of taxpayers. However, since it does not have an inflation
index, by 2010 about 20% of taxpayers will be eligible. The Alternative Minimum Tax is a ticking time bomb. Taxpayers will complain to Congress, not only because the rate is higher, but calculating the Alternative Minimum Tax is a royal pain. Potentially
eligible taxpayers must calculate income and taxes using the regular income tax forms and the Alternative Minimum Tax forms. They then pay whichever tax is higher.
Therefore, Congress realizes that the Alternative Minimum Tax must be reformed before then. However, no one has developed a way to do so without giving up that revenue. For example, an obvious solution would be to index the Alternative Minimum Tax exemption levels for inflation. However, this would lower projected receipts by $370 billion over 10 years.
