Alternative Tax System Moves to Middle Classes

If there was ever a good reason to institute a 'flat tax', this is it. There are other reasons as well but it stands to reason everyone should pay the same percent of their personal income. Why is this so hard to understand? Shouldn't the lower income earners pay the same percentage rate as the rich? Wouldn't that be fair? Aren't progressive Democrats all about being fair?

Well, of course, it isn't all that hard to understand in that those in power that need the funds to get reelected cater to the moneyed group that pressures the politicians to keep the old system. Why is that? The old system benefits are easier to manipulate and therefore everyone makes out except the middle class that always has to pay the bills.

The Alternative Minimum Tax's Ever-Expanding Reach
Source: Veronique de Rugy, "The Facts about the Alternative Minimum Tax," Reason Magazine, June 10, 2011.

The Alternative Minimum Tax (AMT) was created in 1969 to prevent 155 wealthy taxpayers from using deductions and credits to avoid paying any federal income taxes. However, mainly due to the failure to index the AMT for inflation in 1981 when the regular income tax was indexed, the reach of the AMT has expanded over time to hit middle-income people it was never intended to tax, says Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University. As a result, the AMT impacts a growing share of the population.

According to the Congressional Budget Office, last tax season 4.5 million taxpayers were affected by the alternative minimum tax, an increase of over 4 million taxpayers since 1970. Until 2000, less than 1 percent of taxpayers paid the AMT in any given year; by 2008, 3 percent of taxpayers were subject to the AMT.

This stands in sharp contradiction with the original purpose of the AMT, which was to prevent 155 millionaires from using deductions and credits to avoid paying any federal income tax. Nearly half of all states pay less than 0.7 percent of total AMT revenues each, but in California taxpayers who paid the AMT made up 22 percent of total AMT revenues, while 15.5 percent of AMT revenues came from New York, 7 percent from New Jersey and 3.5 percent from Massachusetts.

The bottom line is that the AMT hits people in some states harder than others, says de Rugy.