Tax Day falls on April 17 this year, and so, too, will millions of Americans fall into that parallel universe called the alternative minimum tax (AMT), a place Congress never intended them to be. It needs to beam them back.
Both President Bush and a Democratic Congress profess a desire to fix this broken piece of the tax system once and for all – which would be a fine excuse for bipartisanship (just once this year – please). Such a courageous step might even bring a spirit of compromise on other tax and budget issues that require tending before the nation's fiscal health runs into real trouble in the next decade as baby boomers retire.
It might even lead to a simplification of the tax code. One can only hope.
The AMT was set up in 1969 to make sure the very rich pay at least some tax if they find enough loopholes to avoid any tax. But the AMT's income threshold was never indexed to inflation. So today, taxpayers earning as little as $50,000 might feel the friendly fire of this levy, owing hundreds if not thousands more than they thought. And that's not to mention the extra cost of filing under the AMT's complex rules or the stigma of being tagged as someone eluding taxes.
Without a permanent fix by Congress, the law will strike 23 million taxpayers in 2007, up from about 4 million in 2006. And a large proportion of those tax-filers reside in only a few states, ones that are heavily Democratic: California, New York, Massachusetts, and New Jersey. That puts many Democrats into a tax-cutting mood, at least in regard to the AMT, which provides an opening to work with Mr. Bush.
Some Democrats want to eliminate the AMT altogether. Others seek to index it and reduce its widening bite on the middle class. Bush, meanwhile, remains rather cagey about exactly what he would like to see happen. And the whole effort has been stymied by the gap in revenue that this reform would leave – up to $1 trillion over the next decade.
Should the superrich be taxed even more to make up for the loss? No, say many Democrats as well as the White House. Can Iraq-war spending be reduced? Not over my live veto, says Bush.
The Democrats' fiscal leaders believe they can make up some of the shortfall by asking the IRS to better track unreported income, which is estimated to be $290 billion a year. But a tax crackdown will place a big burden on the 83 percent of taxpayers who comply with IRS rules, and it won't likely fetch nearly that amount. That leaves Bush and Democrats with a need to compromise in other areas. (Both want to balance the budget by 2012.)
Perhaps the easiest course lies in eliminating many of the specialized tax breaks for businesses and individuals and reducing the growth rate in spending for Medicare and Social Security by changing the rules for eligibility in both those entitlement programs. And oh, yes, let's ensure a budget diet free of pork, or those hidden earmarks in spending.
The emboldened Democrats are eager to show fiscal responsibility for next year's election, while voter-chastened Republicans realize their party spent too freely in recent years. Both parties can restore the fiscal discipline set in the early 1990s.
The best place to start is by coming together to curtail the big tax snare called the AMT. •