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Saturday, September 27, 2008

The Alternative Minimum Tax, Vague Loopholes, and Barack Obama

Last night, Barack Obama often referred to "closing loopholes" as a way to generate revenue for the government and making sure that fat cats and corporations pay their fair share. One thing missing from the rhetoric was a specific loophole and how he would close. I have always found demagoguery on loopholes troubling, without specifics, and that's because of the Alternative Minimum Tax.

Congress enacted the AMT in 1969 following testimony by the Secretary of the Treasury that 155 people with adjusted gross income above $200,000 had paid zero federal income tax on their 1967 tax returns. (See Appendix for the AMT’s legislative history.) In inflation-adjusted terms, those 1967 incomes would be roughly $1.17 million in today’s dollars.

This tax avoidance by a few high-income taxpayers was widely perceived as
unfair. Rather than directly addressing the problem by eliminating the
deductions and credits in the tax code that were leading to the tax avoidance,
Congress laid an additional layer of complexity over the regular income tax in
the form of the AMT.

In other words, 155 fat cats were using a LOOPHOLE to avoid paying taxes and Congress supposedly closed that loophole. What has transpired in the forty years since its creation is nothing short of a monster. In making sure that 155 fat cats did pay their taxes, Congress has since raised taxes on millions. In the last ten years, this pernicious tax has begun to affect millions of middle income earners. Because it was never set to inflation, this tax began to eat at them middle class. In fact, for the last two years, Congress has enacted a single year moratorium just to make sure 20 million more middle income folks aren't hit with this tax.

I am always weary of the demagoguing politician preaching against so called loopholes when they have no specifics. That's because I have seen with the AMT that the solution to closing a loophole is often much worse than the problem caused by the loophole itself. What's worse, letting 155 fat cats get away without paying taxes at all or hitting millions of middle income folks with an unexpected tax?

The word loophole is easy to rail against and that's because it carries with it such a negative connotation. Barack Obama acts as though corporations use accounting tricks to hide money. If that were really the case, he would have specifics. Often times, what Barack Obama refers to as a "loophole" is the disclosure of a legitimate expense that corporations should have every right to write off.

Politicians have been railing against loopholes for decades, and yet, I don't know of any that has ever actually successfully done anything to close what are illegitimate loopholes used squarely to avoid paying taxes. I know this because this continues to be a favorite tool of populist politicians. Barack Obama is just the latest to promise to "close loopholes", and the next time one calls for it, just remember the AMT, it closed one loophole and opened up an all new tax nightmare.

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