At the risk of inciting a riot, let me propose that the alternative minimum tax may not be the worst idea since the designated hitter rule. Bear with me a little while before you start looking for something to throw.
The alternative minimum tax is widely unpopular for good reason. It obliterates itemized deductions, including state taxes and mortgage interest not directly related to the purchase or construction of one’s home. It comes as a surprise to the unwary individual taxpayer. Originally intended to keep rich people with clever accountants from escaping income tax, it applies at income levels that hardly qualify for tycoon status ($40,250 for single filers, $58,000 for married couples). The capital gains rate has been temporarily lowered to 15%, but will revert to 20% unless new legislation is enacted. So what is there to like about the AMT?
There are actually a couple of things to like about this tax. First, it is almost perfectly flat. The rate is 26% up to $112,500 for single filers, $150,000 for married couples. Above that, the rate increases, but only to 28%. Depreciation schedules are either straight-line or at least not as accelerated as the MACRS tables used for regular income tax. This brings the cost of tangible assets closer to the way they are presented for financial purposes. Elimination of the state tax exemption keeps the effect of state taxes inside each state’s borders.
The hidden beauty of the alternative minimum tax is that it is almost free of the effects of using tax law for social engineering. There is no income redistribution effect. Most of the rewards and penalties for economic behavior are removed, leaving it an essentially neutral revenue-raising device. It is nearly everything Jack Kemp or Steve Forbes could have asked for. If no legislative remedy is applied, it will slowly become the most common tax regime. Rather than abolishing this tax, perhaps we should consider abolishing all the others.