22 July 2010 Archives

Alternative Minimum Tax Report

Alternative Minimum Tax Report

Introduction

The Alternative Minimum Tax (“AMT”) presents hardships to the practitioner as well as the taxpayer who prepares his own return by, as its name implies, imposing a second tax calculation mechanism on taxpayers. This mechanism brings with it major record keeping and calculation complexities, yet serves virtually no useful purpose-other than the raising of an ever-increasing amount of tax revenue. But as has become very clear in recent years, this increase in tax revenue is not coming from taxpayers who were the intended targets of this tax.

Summary of Conclusion

The AMT does not serve the purpose for which it was intended and functions in a most inequitable manner while adding enormous compliance burdens. It should therefore be changed to eliminate the adjustments for state and local taxes and miscellaneous deductions, update its rates, and modify its exemption.

Discussion & Analysis

The AMT was instituted in its present form when the prior “add on” Minimum Tax” was transformed into the AMT in the early 1980’s. Its “stated” purpose was to require that all taxpayers paid at least a fair share of tax. It was to do this by identifying “loophole” type deductions. {These are referred to as either “preferences” or “adjustments” in the law, and will be referred to hereinafter as “preferences”}. There would then be an alternative calculation using lower tax rates applied against this taxable income as increased by the preferences. However the AMT was seriously flawed from the outset. Instead of focusing on these loophole type preferences (which would have limited the tax to a very small number of tax law “abusers”), the law that was passed included items that were not loopholes at all. And it was then imbedded in an exemption structure which guaranteed that over time all taxpayers would be moved towards paying this tax.

From the beginning, a very substantial majority of all AMT paid by taxpayers results from the following four factors:

Treating state and local taxes as a preference
Treating miscellaneous deductions as a preference
Not modifying the rate to correspond to changes in the regular income tax rates.
Allowing lower exemptions than the regular tax.

Each of these, however, can be quickly shown as innappropriate factors with which to base a tax system intended to just make sure everyone pays a “fair share” of tax.

State and local taxes are hardly a loophole. The taxes exacted by state and local governments are hardly “voluntarily” paid by taxpayers in an attempt to avoid paying federal taxes. Furthermore, reducing a taxpayer’s federal tax liability because he has already paid state and local taxes on that same income already is hardly a loophole.
Miscellaneous deductions is the category of deductions that consists primarily of expenses incurred to earn income that is subject to tax. It includes unreimbursed employee expenses, investment expenses, etc. This is the most basic and important deduction needed to have a truly fair income tax system. For example, if an individual pays a lawyer a fee for collecting back wages, the legal fee is a miscellaneous deduction. If an individual pays the lawyer $300 for collecting $1000 of back pay, netting $700, the AMT would tax the individual on the full $1000.
The AMT rate is generally 28%. This was its rate when regular tax rates were 39.6%. Regular tax rates have dropped, but the AMT rate remains at 28%.
The exemption available under the AMT tax system is a fixed dollar amount which, unlike exemptions and standard deductions under the regular tax system, is not indexed for inflation. Furthermore, it is phased out entirely over certain income levels. That an AMT liability could be caused (or increased) by simply having a lower exemption than the regular tax makes a mockery of the original intent of the AMT. By not keeping this exemption at least as high as the exemption and lower brackets of the regular tax, Congress has simply foisted an illogical and inequitable tax increase on its unsuspecting constituency.

Conclusion

The AMT in its present form has no place in the tax law. If it is kept at all, the addbacks for taxes and for miscellaneous deductions must be eliminated, the rate modified to be appropriately related to regular tax rates, and the exemption made comparable (or greater) than the exemption for purposes of the regular income tax. The AMT is absurdly difficult to administer because of its complex provisions, illogical and inequitable effects, and uncertain interaction with other provisions of the Internal Revenue Code. It is inequitable in the highest order, placing maximum burden on those to whom the most rational elements of the Internal Revenue Code would otherwise apply.

Coming Obamacare Deficits

by | OBAMACARE

David Gratzer over at Townhall.com wrote the following on the coming Obamacare deficits:

On a quiet Friday afternoon this summer, the central justification for President Obama’s health-care overhaul died a quiet death. On that day, a bipartisan coalition in Congress reversed the scheduled Medicare cuts to physician payments, ensuring that, over the next decade, the White House’s reforms will cost many billions more than advertised. After over a year of debate and lofty rhetoric, the reality is this: the president’s goal of “bending” the health-care cost curve has unraveled in just a few months.

The president and his supporters argued that we need ObamaCare in order to tame the federal budget deficit. When he signed the bill into law, the president touted the importance of the legislation in reducing long-term deficits. Democrats cited Congressional Budget Office scoring showing that the health legislation would reduce the deficit over ten years to the tune of roughly $130 billion. But that was back in March.

In May, the CBO released its quantitative analysis showing that discretionary spending not accounted for in the previous scores would cost $115 billion. The CBO director himself expressed significant doubts about potential deficit reduction. Speaking to the Institute of Medicine, he said: “Rising health costs will put tremendous pressure on the federal budget during the next few decades and beyond. In CBO’s judgment, the health legislation enacted earlier this year does not substantially diminish that pressure.”

That brings us to the quiet Friday afternoon of June 25. By cancelling scheduled Medicare cuts, the president and his Congressional allies have made the fiscal problem even worse: Not only do those fiscal problems remain, but White House reforms meant to address them will push net federal-government health expenditures further into the red. Any notion of fiscal balance has been lost.

Yet cancelling these scheduled Medicare cuts is nothing new. Time and again, Republican and Democratic leaderships in Congress have haphazardly voted to undo scheduled cuts.

Congress reversed planned Medicare physician cuts in 1999—and 2004, 2005, 2006, and 2008. In fact, since 1997, when members of both parties agreed to automatic cuts if spending rose faster than population and economic growth, the program has been cut just once, in 2002. Maybe it’s the pressure of the doctors’ lobby. Maybe it’s the seniors’ lobby. Maybe it’s both.

And this Democratic Congress has been no better. In fact, just months after passing Obama’s health-reform legislation, Democrats vigorously and successfully pushed to postpone the Medicare cut until November (they had previously voted to delay it from April to June 2010).

More worrisome is this: in liberal circles, it’s popular to argue that Congressional efforts to control Medicare costs under the Sustainable Growth Rate (SGR) formula have been overly successful. James R. Horney and Paul N. Van de Water make exactly this point in a publication for the liberal Center on Budget and Policy Priorities. They write: “Even though Congress did not allow the full cuts required under the SGR formula to take effect, it has still cut the physician reimbursement rate substantially – at its current level, the reimbursement rate in 2010 will be 17 percent below the rate for 2001, adjusted for inflation.” Picking up on this point, Paul Krugman recently argued that Medicare has been historically very successful at reigning in costs. But praising Medicare cost containment in a time of heavy health-care cost inflation is like praising Lehman Brothers for making good investments in Latin America when the market for subprime mortgages was imploding.

Let’s put this in perspective: health inflation was 3.4 percent last year, just over double the basic inflation rate. Tellingly, the worst cost increases were experienced by Medicare (costs were up 8.6 percent), and Medicaid (9.9 percent).

Unfortunately, the White House and Congress squandered a great opportunity to bend the cost curve downwards, opting instead for the status quo. The quiet congressional vote in June shows how far the administration has strayed from its reform rhetoric. If we are ever to reign in health care spending, we need leaders who will make tough choices and tough cuts. Their rhetoric must become reality.

http://townhall.com/columnists/DavidGratzer/2010/07/15/the_coming_obamacare_deficits