Since yesterday I compared the health plan taxes in Congress to the Alternative Minimum Tax, I suppose it’s only right if today I discuss that tax itself. The infamous tax was enacted to target upper class taxpayers who paid less than ‘their fair share’ of taxes. It went into effect in 1970.
Unintended Consequences
Of course, as you know by now, the tax wasn’t indexed for inflation. The tax was intended to target households making $100,000 to $500,000 annually who paid less in tax than the government desired. At the time the law was passed, 155 American households fit that description. In 2004 the Congressional Budget Office declared that 1 in 5 taxpayers would be snared by the AMT in 2010, if nothing was done to patch the law. Why?
Inflation Creep
Inflation not only eats into the purchasing power of households, it also increases tax liabilities when said taxes aren’t indexed to inflation indexes. The AMT is one of those taxes. In 1970, the CPI index in January stood at 37.8. Today (October 2009) it stands at 216.117. Yes, a tax that once targeted 155 tax returns now solidly targets the middle class (I speak as a resident of San Jose, California). Inflation has increased the index 371.74% and allowed the tax to creep into the common consciousness. What once hit households making $100,000 to $500,000 annually, now hits many more people.
Congress has annually been passing one year ‘patches’ which go part of the way to allowing more to avoid this tax. Last year, they waited until December. This year, Congress added the AMT patch into the Stimulus Bill. For more information about the Alternative Minimum Tax, check out Fairmark’s coverage of the law. Basically anything you want to know about it can be found on their site.
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