Tax Policy Logic

Ok, so on this day after the filing deadline for income taxes it seems timely to discuss some logic. The Alternative Minimum Tax was created because some in Congress thought that some "wealthy" taxpayers were not paying their fair share. Never mind that the data did not support their hypothesis. Data here did not matter, the logic of sticking it to the rich did. According to the Tax Foundation a substantial portion of the tax burden is paid by the to one half of one percent. Go into 5% of taxpayers and the total percentage of tax paid approaches 50%. In a recent study the Foundation found that "fully 60% of all Americans are net consumers of government services." (i.e. they get more than they pay) and that this redistribution might amount to $1 trillion.

So the AMT was set up to catch those few miscreants who don't share in that burden. But here is where the logic stops. The AMT disallows some legitimate deductions including things like tax exempt interest. But it also rejects state and local taxes. So, if you are following the logic so far, if I attempt to pay my local and state taxes legally I am penalized by the AMT and bear a higher burden at the federal level - thus I pay a higher state burden and then am double kicked with a higher federal burden. Or to turn the logic on its head, if I try to evade state and local taxes, I reduce my chances of paying the AMT.

The Foundation found in a new 2007 poll of tax attitudes that a majority of U.S. adults believe the federal tax code is complex, that the federal income taxes they pay are "too high," and the federal tax system needs major changes or a complete overhaul. The poll also found that just 10% of taxpayers are willing to pay higher taxes to eliminate the federal deficit. 66 percent) favor a complete elimination of the federal estate tax. The skepticism that Americans evidence on their tax system is understandable when you think about the logic that went into the development of policies like the AMT.