Senator Grassley’s Floor Speech on the Alternative Minimum Tax, Part 2
Mr. President, I stand before you to continue the discussion on the Alternative Minimum Tax,or AMT, that I started earlier this week. As I pointed out, it is generally recognized that the AMTis a policy failure. Created in 1969 in response to the discovery that 155 wealthy taxpayers were ableto eliminate their entire tax liabilities through legal means, the AMT captured more than 3 millionpeople in 2004. I'm using 2004 numbers because 2004 is the most recent year we have complete IRSdata for. 3 million people were captured, even with the hold-harmless provisions that have been inplace since 2001.
I also cited the widespread observation that the most significant structural flaw afflicting theAMT is the failure to index its rates and exemptions for inflation. This failure has resulted in thegradual encroachment of the AMT into the middle class, where taxpayers are being hit with a taxthey were never intended to pay.
Despite widespread agreement that something needs to be done about the AMT, agreementon what exactly to do is not so widespread. A major factor in the disagreement relates to the massiveamount of money the AMT brings to the federal government. In 2004, AMT filers paid more than$12.8 billion into the Treasury.
If we don't extend the most recent AMT hold-harmless that actually expired at the end of2006, that number is projected to balloon to a much greater amount, and long term budget forecastscurrently show this greater amount coming into the Treasury. When forecasters put their projectionstogether, they are working under the assumption that the hold-harmless that was extended in lastyear's tax bill will not be extended, because they base their assumptions on current law. Because ofthis, budget planners make the assumption that revenues will be much higher than everyone who isfrustrated with the AMT thinks they ought to be.
The reason for this is that the AMT "balloons" the revenue base, as it is projected to increaserevenues as a percentage of GDP. There is a great deal of evidence to support this.
On a side note, a senior well-respected tax lawyer on the other side of the aisle in the otherbody took exception to my use of the term "ballooning." The staffer wrote an article and criticizedme for the term. While I'm not used to staff writing articles criticizing Members, I responded to thestaffer's criticism through my staff. The essence of the senior tax staffer's criticism was that the termballooning ignored the accounting for the interaction of bipartisan tax relief with AMT costs.
As we pointed out, ballooning revenue from the AMT occurs in the out years, whether or notthe bipartisan tax relief is extended or made permanent. I will talk more about the point in a fewminutes.
The non-partisan Congressional Budget Office has consistently forecast this ballooning yearafter year. This chart, reproduced from CBO's "The Long-Term Budget Outlook," published inDecember of 2005, shows how total federal revenues are expected to push through the 30-yearhistorical average and then keep going up.
I just want to note that although the "Tax Increase Prevention and Reconciliation Act of2005" was signed into law after this analysis was published, the 2006 tax bill extended the AMThold-harmless only through 2006, and this chart shows federal revenues all the way to 2050. It isimportant to note the long term effects of the AMT on the revenue base.
There may be some doubters who hesitate to attribute this ballooning of revenues to theAMT, but this next chart illustrates the drastic expansion of the AMT, under current law, over thenext 43 years.
This is also from the non-partisan CBO. You can clearly see that the share of householdssubjected to the AMT increases alarmingly to around 65 percent. I don't know what the populationof this country is going to be in 43 years, but I know that 65 percent of the population in 2050 willbe more than the 155 taxpayers the AMT was intended to target in 1969. This chart also shows howthe AMT will assume a greater and greater share of total individual income tax liability. The CBO'sreport states that "by 2050, roughly 15 percent of individual income tax liability would be generatedby the AMT, compared with about 2 percent today." And this is what will happen if we don't doanything. The analyses done by the CBO clearly shows an upcoming ballooning of federal revenuesaccompanied by a corresponding bloating of the share of households and the share of total liabilityattributable to the AMT.
A particularly wrongheaded argument that has been advocated is that the Bush tax cuts areresponsible for increases in the number of people hit by the AMT. Some think that the Bush tax cutsare increasing some peoples' incomes so much that they are subject to the AMT, and that making thetax cuts permanent will only make the problem worse. This sort of reasoning is deceptive and couldnot be more wrong. First, the analysis I have presented done by the CBO looks forward all the wayto 2050, and the Bush tax cuts under current law will sunset by 2010. As I have previously said, theAMT's greatest flaw is that it is not indexed for inflation, and inflation is going to continue whetherthe Bush tax cuts are extended or not. This chart from the CBO illustrates how the AMT willcontinue to be a money machine regardless of any other factor.
The bottom line illustrates individual income tax liabilities if the Bush tax cuts are madepermanent and the AMT is modified. The middle line illustrates current law with the permanenceof the Bush tax cuts, and the very top line is current law. If the Bush tax cuts are allowed to sunsetand the AMT is left to grow and consume our middle class, the AMT will still balloon revenuesanyway. Any argument that making the Bush tax cuts permanent will worsen our AMT problem iscompletely false. The AMT is a problem all by itself.
As I said earlier, the problem with all of the projections showing the AMT ballooningrevenues is that these projections are used to put together budgets. This means that the centralproblem in dealing with the AMT is money. There are some people who say we can only solve theAMT if offsetting revenue can be found to replace the money that the AMT is currently forecast tocollect. Anyone who says this sees the forecasts showing revenues being pushed up as a percentageof GDP and wants to keep them there. These arguments are especially ridiculous when oneconsiders that the AMT was never meant to collect so much revenue. As a policy instrument theAMT has been and continues to be a complete failure.
As I discussed earlier this week, the AMT was originally conceived as a means to ensure thatextremely wealthy taxpayers were not able to game the system and avoid their entire tax liabilities.In 1969 the AMT was calculated to hit 1 in 500,000 people. There is absolutely no way anyone cancall the AMT anything close to a success.
The AMT has even failed in its objective to ensure that no citizen, no matter how wealthy,was able to completely avoid the federal income tax. In 2004, IRS Commissioner Mark Eversoninformed the Finance Committee that the same number of taxpayers, as a percentage of the tax filingpopulation at large, continues to pay no federal income tax. According to an IRS analysis of tax year2003 data, 2,366 taxpayers with incomes of $200,000 or more who did not use the medical anddental expense deduction had no income tax. The AMT has failed in every way except for the abilityto raise very large sums of money. While it may be hard for some to turn down taxpayer money,whether we are supposed to collect it or not, no one has trouble spending it.
This means that some want the taxpayer to pay the price for a tax that was designed poorlyand through a comedy of errors was allowed to flourish.
It is simply unfair to expect taxpayers to pay a tax they were never intended to pay, and it iseven more unfair to expect them to continue paying for that tax once we get rid of it. The reform orrepeal of the AMT should not be offset because it is money we were never supposed to collect in thefirst place.
The way to solve this problem is to look on the other side of the ledger, to the spending side.Budget planners need to take off their rose-colored glasses when looking at long-term revenueprojections and read the fine print.
In general it is a good idea to spend money within your means and that is true in this case aswell. If we start trying to spend revenues we expect to collect in the future because of the AMT, wewill be living beyond our means. We need to stop assuming that record levels of revenue areavailable to be spent and recognize that the AMT is a phony revenue source.
As we consider how to deal with the AMT, we must first remember that we do not have theoption of not dealing with it. The problems will only get worse every year and make any solutionmore difficult. We must also be clear that the revenue the AMT would not collect as the result ofrepeal or reform should not be offset as a condition of the repeal or reform. We shouldn't call it lostrevenue because it is revenue we never really had to begin with.
Making the offsetting of the AMT's ill-gotten gains a condition of an AMT fix is to punishthe American taxpayer for an ill-conceived and poorly executed policy that has been a total failure.Aside from not increasing the proportion of wealthy taxpayers that pay income tax, the AMT isprojected to balloon federal revenues over historical averages and to become a greater source ofrevenue than the regular income tax. Budget forecasters need to recognize that the AMT is not alegitimate source of revenue and Congress needs to be disciplined enough to show restraint onspending so that an AMT solution doesn't boil down to the replacement of one misguided policy withanother. I yield the floor.
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