This week’s “Daily Journal” guest columnist is Paul Messino, Project Management Specialist for the John Locke Foundation.
The technology of tire repair has come a long way.
In the past, if a car popped a flat, drivers had few options. Depending on the cause and location of the leak, a tire might or might not be viable. Nowadays, not only can you get your tire patched, you also can do it at home, or even purchase tires that self-seal upon puncture.
While a tire patch may preserve the life of your tire, it won’t extend it. Granting that the patching process works, your tire is still only as good as it was when you bought it. And consumers have no problem accepting this fact.
If American consumers follow this logic, why does it seem like many are pleased with Congress’ latest action on the Alternative Minimum Tax (AMT)?
Passed in 1969, the Alternative Minimum Tax was designed to ensure that taxpayers earning large incomes paid a fair share of the federal income tax. Stories of the wealthy ducking out on income taxes by taking advantage of tax shelters, preferential investment opportunities, and incentives inherent in the tax code led to this separate method of calculating federal income tax.
If your gross income is more than $75,000, you will probably have to figure out your tax liability two ways: with the old-fashioned 1040, including its regular litany of deductions and exemptions; and with Form 6251, a completely different way to calculate federally taxable income with its own type of deductions. After calculating both, you pay the greater of the two dollar figures.
Never adjusted for inflation, the AMT tax brackets continue to capture an increasing number of the population as our economy grows. Those most affected by this foreseeable problem live in relatively high cost-of-living areas with high incomes and high state and local taxes. The benefits of federal tax cuts, like those initiated by President Bush, only play into the AMT trap by adding to your gross income.
In a state-by-state lineup, the taxman would identify more people in the Northeastern and Western United States for an invitation to join the AMT club. But that doesn’t mean North Carolina is in the clear. According to the most recent data compiled by the Congressional Research Service, our state was ranked 17th in AMT returns as a percentage of total tax returns.
Whenever the AMT creeps up on more taxpayers, Congress zooms into action with new tax credit provisions and increases in basic AMT exemptions. Just this week, Congress and the president are on the verge of updating the AMT by tinkering with exemptions. These new patches to the system keep the tire of taxation inflated. But the structural integrity of the tax tire continues to be deficient. Sooner or later, this motley tire will have to be replaced.
From the beginning, the AMT was a worthless addition to the tax code. Not only did it fail to identify and fix the underlying problem of tax avoidance, it added to it. Creating an additional tax system with its own set of exemptions and provisions that must be amended every few years is not the way to remove tax loopholes.
To make the federal income tax code viable (that is if you want to stay with a national income tax instead of a consumption tax), the AMT should be abolished. Instead of using the AMT patch, the tax system should be redesigned to capture the revenue lost to exemptions and deductions – the total of which amounted to about a quarter of all personal income in 2006. By spreading the tax over the broadest amount of the population possible, everyone’s tax rate could be reduced substantially without jeopardizing revenue.
Whether or not Congress ever takes on the federal tax code, it’s clear that another patch won’t cut it. Eventually, you’ve got to get a new tire.