Alternative Minimum Tax Puzzle
The graph in this Wall Street Journal piece shows a steep rise in the proportion of middle-income taxpayers who will be subject to the Alternative Minimum Tax. Greg Mankiw reproduces the graph. I could not think of a reason for such a sharp rise. Andrew Chamberlain and Patrick Fleenor offer a hint.
A far more important factor causing the AMT’s recent expansion is the effect of the 2001 and 2003 Bush tax cuts. Ironically, by reducing regular income tax liabilities without substantially changing the AMT, the Bush tax cuts will be responsible for most of the expansion of the AMT through 2011 (see Figure 1). Since taxpayers must pay the greater of either their AMT or regular tax liability, the decline in income tax liability without any change in the AMT pushed many taxpayers into the AMT.
So, if you were just humming along, earning your usual income and taking your usual deductions, your tax liability was reduced by the Bush tax cuts, which made you subject to the AMT. In that case, the Bush tax cuts were not really tax cuts (or at least, not as much as one might think) for a lot of folks. There are all sorts of subtle implications of this. It’s making my head hurt trying to keep them straight. For example, would a straight repeal of the Bush tax cuts move people from the AMT back into the regular tax system, but not gain much revenue?