Why Buffett When We’ve Already Got an AMT?

April 11th, 2012 at 9:53 pm

A strain of comments have reasonably wondered: why do we need a Buffet rule when we already have an Alternative Minimum Tax (AMT), presumably created to accomplish a similar goal of not allowing the wealthiest families to avoid paying their fair share by exploiting loopholes?

My first reaction was: well, if the AMT worked, we wouldn’t need the Buffett rule.  But when you look at the results I enumerate here—lots of very rich people face average rates at or below that of the middle class–it’s clear the AMT ain’t working.

But, as is my wont, I checked this hunch with tax experts at CBPP, and here’s what I got (h/t, CCH):

–It (the AMT) obviously doesn’t work very well, because all of the statistics (see link above) and pictures like the one below, from here, are with the AMT in place!

–As the figure shows, the AMT fails to block the preferential treatment of asset-based, or investment, income, like cap gains and dividends…and these types of income mean a lot to millionaire+ households.

–AMT rates are still well below top marginal income tax rates: 26% and 28% instead of 35% (going up to 39.6% if those darn highend Bush cuts ever sunset).

–Still, without the AMT, the after-tax distribution would be even more skewed than it already is, so it’s doing some good.


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5 comments in reply to "Why Buffett When We’ve Already Got an AMT?"

  1. urban legend says:

    But this doesn’t answer how they are getting around it. The standard capital gains rate may be 15%, but the AMT rate on capital gains and dividends is supposed to be 25% — barely lower than the AMT rate for other income (26%).

    Maybe the first order of business is to find out exactly what’s wrong with the AMT and how people who are supposed to be paying 25-26% are paying only 14 or 15%. Then fix that. The rate difference (26 or 25% compared to proposed 30%) is secondary. The AMT is supposed to be preventing exactly what Buffett and Romney say they are getting.

    It is bothersome that we’ve had all these articles about the “Buffett Rule” and it has to be left to commenters on blog posts to see the elephant in the room.

    • Jared Bernstein says:

      Sure it does…AMT rate on cap gains is 15%…(though the cap gains themselves can eat up your AMT exemption).

      • urban legend says:

        See this.

        On the other hand, there is an AMT Tax table in Wikipedia (which usually is fairly reliable for this kind of technical information) that shows the capital gains rate as 25%. Another article says it will work out to a 21-22% rate on capital gains for most (upper middle class) taxpayers, but then effectively revert back to 15% for very wealthy taxpayers.

        Actually, it’s all thoroughly confusing. Looking at the IRS AMT instructions is more than a daunting task, one that would give even Thomas Aquinas great difficulty. I cannot tell from there what kind of rate is supposed to apply.

        I guess my larger point is that neglecting to even mention the AMT in connection with the “Buffett Rule” makes everyone discussing it look out of touch with the real world out here, where some of us who aren’t really wealthy have had to deal with it.

        The political posture should be this: not that we are doing something new to “get” the rich people, but that we are fixing a giant hole that lets the really wealthy escape paying their fair share under the existing tax scheme. We have this thing called the “Alternative Minimum Tax” that was supposed to prevent exactly this kind of thing, and make everyone with higher incomes pay at least a minimum amount. But the only people it really affects are middle class taxpayers. There is a huge loophole that allows the really wealthy to virtually escape the AMT entirely. We need to fix that and make the AMT work the way it was supposed to work. Politically, that’s a much better message, one that enlists even the upper-upper-middle class (incomes of several hundred K who apparently are affected significantly by the AMT).

        Making something we already have (and that most of us have already heard of) work the way we all imagined it was supposed to work is a much better political message — non-radical populism that almost everyone in the interest of fairness, including most of the upper echelon of the chattering classes, can get behind — than that we are doing something new to “get” the wealthy. Making something we already have work the way it was supposed to work does a much better job of undermining the opposition message, too.

        I’m not sure I am making myself clear, but if you get the gist of what I am saying, I hope you will use your connections and pass it on to those who can do something about it.

  2. SJS says:

    Isn’t the main reason the graph above shows a higher effective tax rate for the middle income is that it includes payroll taxes? I have a few children and my income fluxes all over the place and have noticed when I make below $70K my federal income tax is insignificant compared to my payroll taxes. Its years I make >$150K that I notice I do worse than millionaires on federal taxes because it doesnt get the preferential cap gain treatment.

    If s.s. & medicare (and thus payroll taxes) were discontinued that would fix the disparity. Thats obviously not gonna happen, so the flip side would be to finally admit FICA a tax and not a payment into a pension system. This would make it easier to tax above the caps and unearned income without having to increase later payouts to those high earners.

    I think all this AMT & Buffet rule stuff is avoiding the real work anyway. SHould cap gains get preferential treatment or not? Should there be tax free bonds? SHould mortgage interest be deductible? SHould charitable gifts be deductible? If there are good reasons for all these things then why would I have a problem with someone paying less taxes. IF not, then fix them.

  3. pjr says:

    I recall that Obama’s proposed budget for next year would eliminate the AMT and impose a replacement that is much simpler–a Buffett rule that in fact would be what he says it would be (and is different than what Congress is now considering). His replacement would be closer to what the AMT was originally meant to do, i.e. ensure a tax rate on very high incomes.

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