The Buffett Rule Can’t Pay for AMT Repeal

By :: March 15th, 2012

Congress originally enacted the alternative minimum tax (AMT) to make sure that high-income folks would pay at least a minimum amount of income tax. Sound familiar? It seems awfully similar the “Buffett rule,” the principle that those with incomes above $1 million should pay at least 30 percent of their income in taxes.

As currently constructed, the AMT adds enormous complexity to the tax code and increasingly burdens middle-class families. So it seems natural to ask: why not just replace the AMT with a version of the Buffett rule?

To help answer that question, the Tax Policy Center estimated what it would cost to scrap the AMT and enact the Fair Share Tax, a recent legislative proposal that would impose a 30 percent minimum tax on individuals earning more than $1 million. (The tax would phase in so its full force wouldn’t hit taxpayers as soon as their income topped $1 million.)

We found that the Fair Share version of the Buffett rule wouldn’t come close to paying for AMT repeal. Scrapping the AMT would lose a whopping $1.2 trillion relative to current law between now and 2022. The Fair Share Tax would only recover about $100 billion of that revenue, for a net loss of $1.1 trillion.

What would it mean relative to current policy – a more realistic baseline under which the AMT would be permanently patched and the 2001/2003/2010 tax rates extended? The AMT fix would reduce revenue by $550 billion over the decade while lower rates would boost the amount the Fair Share tax would bring in by about $150 billion. The net: the swap would still lose $400 billion over 10 years.

Why does the AMT generate so much more revenue than the Fair Share tax? The biggest reason is that the AMT simply hits a much bigger chunk of taxpayers. By design, the Fair Share tax wouldn’t affect anyone making less than $1 million. Yet 96 percent of AMT taxpayers have incomes under $1 million, accounting for 77 percent of all AMT revenue. The Fair Share tax would need to start at a much lower income level to make up the lost revenue from the AMT.

The AMT may be a mess, but it would be awfully costly to replace.

9Comments

  1. Michael Bindner  ::  5:14 pm on March 15th, 2012:

    The dirty little secret of tax reform is that while doing it pays lip service to eliminating the AMT, real simplification effectively scraps the entire tax code while making everyone pay some version of the AMT (at least those who still pay taxes rather than paying only consumption taxes instead).

  2. AMTbuff  ::  6:21 pm on March 15th, 2012:

    The current law baseline has the AMT exemption at its unindexed 1993 level. By analogy, if we were to take the unindexed 1993 regular tax rates and exemptions as a baseline, any sane tax policy would suddenly “cost” hundreds of billions of dollars per year.

    The “cost” of AMT repeal is a property of the fantasy baseline and of AMT bracket creep from 1993 to 2001, years during which the regular tax was indexed but the AMT was not. Indexing to inflation retroactively to Day One is the reality-based baseline.

    Otherwise, if the baseline does not need to make sense, why don’t we just adopt the 1960 tax rate schedule as a baseline? We could give everyone a huge tax cut, including the rich! If that idea makes sense to you, you are way too far inside the beltway.

  3. Ralph H  ::  7:13 pm on March 15th, 2012:

    The dirty secret of the AMT is that it raises a lot of money from upper middle class families, particular from 2 income professionals in high tax states. This permits rewarding those 47% of people who pay no federal income tax with increasing rewards. I doubt it snares the high income folks like it was designed or else there would be no talk of the Buffett rule. The AMT is particularly galling if you are a dual earning couple in a high tax state like NJ where the property taxes are high and the progrssive(?) income tax maxes out at under 100K.

  4. Current Buffet Rule Cannot Replace Revenue of AMT  ::  12:46 pm on March 19th, 2012:

    […] the Buffet Rule (Fair Share Tax) would lead to substantial losses in revenue for the government.  (Read his article here).  However, Obama does not lay out a clear plan how he will make up for the lost […]

  5. r.j.'s space  ::  5:50 am on April 17th, 2012:

    […] pay at least a minimun flat rate; a recent study by the nonpartisan Tax Policy Center shows that repealing the AMT would cost the government roughly $1.2 trillion in revenues over the next decade; so although obama’s plan does shift some of the burden from the moderately rich to the […]

  6. A Simple Explanation on How Romney Is Lying to You About His Tax Plan ‹ I Acknowledge Class Warfare Exists  ::  9:04 pm on October 5th, 2012:

    […] Repeal the Alternative Minimum Tax – $1.2 trillion over 10 years (source) […]

  7. Taxing the Wealthy on the Margins and on Average | The Principal Blog  ::  11:18 am on November 29th, 2012:

    […] AMT with the Buffett Rule (which may sound that a logical thing to do), it would, in fact, mean a net loss of between $400 billion and $1.1 trillion in revenue, depending on policy […]

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