PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

“Big 6” Tax Framework: Eliminating the Unfair, Complex and Detested AMT

By at 5 October, 2017, 11:27 am

Small Business Policy Insider

Special Edition: Tax Reform 2017

 

A series on key reform measures in the unified framework and their importance to entrepreneurship and small business growth

by Raymond J. Keating-

The very existence of the alternative minimum tax (AMT) is a result of Congress and the White House over the decades being unable to make rational reforms to our tax system. The “Big 6” tax framework, however, would eliminate both the individual and corporate AMTs.

The History of the AMT

The original individual AMT was imposed in 1969, and it came about due to a tiny number of high-income earners in 1967 failing to pay any federal income taxes.

Treasury Secretary Joseph W. Barr reported to Congress in early 1969 that 155 people earning more than $200,000 (or about $1.5 million today) had paid no income taxes in 1967. Those individuals broke no laws. Rather, they simply used the tax laws available at the time.

When you think about it, 155 people is not a big deal, but politics being politics, it was deemed that something had to be done. But instead of fixing the tax code – such as dramatically lowering tax rates and eliminating deductions without merit – Congress chose to impose another tax alongside the regular tax code. Hence, the AMT was born.

The Ensuing Years, and the Impact

The individual AMT has been altered many times over the years, and reaches much further down the income scale to ensnare taxpayers. With the AMT, individuals, in effect, must do their taxes twice – once according to the standard income tax and a second time under the AMT – and then pay the higher of the two tax bills.

The AMT limits deductions, credits, and so on. In 2017, the AMT exemption amounts (which are now indexed for inflation) are, for example, $54,300 for an individual and $84,500 for those married filing jointly.

Also in 1969, as explained by Terrence Chorvat and Michael Knoll in a paper titled “The Case for Repealing the Corporate Alternative Minimum Tax, Congress imposed a corporate AMT – at the time known as an “add on” minimum tax – which was a tax on “tax preferences” above a certain level. Later, actually in the 1986 Tax Reform Act (the last time the U.S. did tax reform), the AMT was altered. As the authors explained:

“The corporate AMT operates as a separate corporate income tax paral­lel to the regular corporate income tax. Unlike the earlier add-on mini­ mum tax that it replaced, the current corporate AMT requires affected corporations to calculate their tax liability under two parallel tax systems. First, a corporation calculates its income tax liability under the regular corporate income tax; then, it must calculate its tax liability under the corporate AMT. As the phrase ‘alternative minimum tax’ implies, the corporation pays the greater of its regular tax liability or its liability under the AMT.”

Today, the corporate AMT rate is 20 percent, and again, is calculated based on income level and limiting assorted deductions, credits, etc. (For a brief summary on the corporate AMT, including the small business exemption level, go here.)

So, what’s the problem?

To sum up, the AMT increases tax complexity and costs, and it limits the effectiveness of various tax deductions and credits that can have beneficial effects for individuals, small businesses and the economy.

The AMT’s Unpopularity

Interestingly, as the New York Times noted earlier this year, “Hardly anyone likes the alternative minimum tax, a provision that both President Trump’s skeletal tax plan and the House Republican overhaul would eliminate. At its most basic, the A.M.T.’s goal is simple: In a tax system with enough loopholes to fill a macramé tapestry, the idea was to ensure that the richest taxpayers were not able to skip out on paying altogether… But critics across the political spectrum have long complained that it has failed to live up to the promise.”

For good measure, the IRS National Taxpayer Advocate has called for eliminating the individual AMT, pointing out:

“Today’s AMT primarily affects taxpayers for paying state and local taxes and having children. While it is hard to imagine the drafters of the original AMT provision would view the expenses of having children or paying local taxes as tax-avoidance loopholes, that is how those expenses are treated today. More importantly, the AMT is unnecessarily complex and burdensome for everyone. It requires taxpayers — even if they do not owe AMT — to compute their taxes twice, once under the regular tax rules and again under the AMT rules. Moreover, the complexity of the AMT reduces the transparency of the tax system, making it more difficult for people to know their marginal tax rate and predict what they will owe. When people owe more than anticipated, voluntary compliance suffers.”

As for repealing the corporate AMT, which also affects many small businesses structured as C-corps, Chorvat and Knoll argued that it “imposes substantial additional compliance costs, and that it raises little and possibly no revenue.”

By reducing complexity and costs, ending the AMT is a solid measure included in the “Big 6” tax reform framework announced late last month. Repealing the AMT will help small businesses, the economy and promote fairness and efficacy in our tax system.

Related content on Tax Reform and the Big 6 Framework:

The Big 6 Framework a Plus for Entrepreneurs and Small Businesses

Women Entrepreneurs Say Tax Reform Will Help Their Firms Compete, Grow and Thrive: “It’s an Access to Capital Issue”

Advocate and Entrepreneur Says Tax Framework a “Good Start” and Supports House Small Business Bill to Modernize Tax Code

Big 6 Framework Features Expensing: A Critical Provision for Small Business

Big 6 Tax Plan Features Lower Rates for Small Businesses and Entrepreneurs

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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