No Alternative, No Tax Problem
The GOP this week will try to compromise on a final tax bill that can make it through both houses of Congress and Senate budget rules that often conspire against good policy. Last week Senate Republicans exhumed a loathed portion of the tax code to “save” money, and the reformers ought to dump these alternative-minimum taxes.
The House bill strikes the corporate and individual AMTs, which require filers to calculate two sets of income taxes and pay whichever one is higher. But the Senate bill resurrected both because Republicans needed the revenue to buy off some GOP holdouts—while also complying with the chamber’s reconciliation rules that ban deficits outside the 10-year budget window.
The most glaring Senate problem is the rate on corporations. The point of the AMT is to prevent companies from eluding taxes with credits and deductions. Yet the current AMT rate is 20%—the same as the bill’s proposed top rate on corporations. If the AMT rate stays at 20%, and the normal tax rate is cut to 20% with a few more deductions, then the AMT would become the de facto corporate tax—and a stalking horse for Democrats to raise when they’re next in power.
Another issue is that the Senate bill also crafted a form of corporate-minimum tax to stop “base erosion” in which multinational companies try to reduce tax liability. If the original AMT returns from the nearly dead, would some corporations have to crunch yet another set of separate tax assumptions? This is an illustration of why businesses waste so much time and money on tax compliance.
The prospect is no more appealing on individuals, though the Senate bill would increase the exemption. About 60% of filers earning between $200,000 and $500,000 are subject to the tax, according to an analysis by Duke University’s Richard Schmalbeck. Compare that with less than 20% for filers north of $1 million. This shows the perversity in a levy that was ostensibly created to ensure that the wealthiest pay income tax.
The provision would amplify the bill’s biggest flaw, which is slamming productive high earners in states with high taxes. These earners face a top rate of 38.5% in the Senate bill (39.6% or higher if the House bill prevails). The filers will lose the state-and-local income tax deduction, which filers ensnared by the AMT can’t claim under the alternate calculation. One argument for dumping the state-and-local deduction has been that at least taxpayers won’t have to bother with the hassle of AMT.
The positive news is that almost no one is defending this idea on the merits. The Senate had to make the math work in a pinch last week, and now let’s hope Republicans offload the AMT in conference. The solution is to cobble together more items that broaden the tax base, and on this score the House bill is better.
For instance, the House bill caps the mortgage-interest deduction at $500,000 and eliminates the write-off for second homes. The Senate bill does not limit that subsidy for wealthy homeowners. The House bill is also more aggressive on breaks for higher education and green energy subsidies.
The AMT is a classic example of why the tax code needs an overhaul, with its inefficiency, complication and punitive nature. If the GOP wants to pass a bill that can credibly be called reform, then the AMT should die an unlamented death.
Appeared in the December 6, 2017, print edition.