Ev­ery­one hates it, but it’s the rea­son Trump paid.

Law pro­fes­sor Erin Scharff says the al­ter­na­tive min­i­mum tax, though flawed, serves a pur­pose

The Washington Post Sunday - - OUTLOOK - erin.scharff@asu.edu Erin Scharff, an as­so­ciate pro­fes­sor at the San­dra Day O’Con­nor Col­lege of Law at Ari­zona State Univer­sity, teaches fed­eral in­come tax­a­tion.

As­mall por­tion of Pres­i­dent Trump’s 2005 tax re­turn is now pub­licly avail­able. Th­ese two pages are more ci­pher than in­for­ma­tion. With­out the nu­mer­ous pages of sup­port­ing sched­ules, it is hard to know why Trump was able to claim more than $103 mil­lion in losses, off­set­ting much of the $153 mil­lion in in­come he re­ported. But one thing is clear: The vast ma­jor­ity of the taxes he and his wife paid that year were a result of the al­ter­na­tive min­i­mum tax. With­out it, Trump would have owed just $5 mil­lion to the gov­ern­ment. The AMT added $31 mil­lion. (Trump also owed self-em­ploy­ment taxes, which brought him to $38 mil­lion.)

The AMT truly is an al­ter­nate tax. When con­gres­sional tes­ti­mony in 1969 re­vealed that 155 tax­pay­ers with more than $200,000 in in­come (about $1.3 mil­lion in to­day’s dol­lars) avoided all in­come tax li­a­bil­ity by us­ing loop­holes and shel­ters, vot­ers were in­censed. At that time, mak­ing more than $19,000 put you in the top 5 per­cent of earn­ers, and Congress got more let­ters that year about th­ese zero-li­a­bil­ity tax­pay­ers than about the Viet­nam War. So law­mak­ers passed a se­ries of re­forms that cul­mi­nated in the AMT, de­signed to pre­vent wealthy tax­pay­ers from de­ploy­ing cer­tain de­duc­tions to re­duce their taxes too much. Even at the time, some ques­tioned this re­form: If the de­duc­tions were the prob­lem, why not just elim­i­nate them rather than fur­ther com­pli­cate the tax code?

To­day, the AMT is widely panned by Repub­li­cans and Democrats; Trump and Bernie San­ders both want it gone. The text­book from which I teach my “In­tro­duc­tion to In­come Tax­a­tion” course does not mince words: “Ev­ery­one agrees it is a ter­ri­ble pro­vi­sion,” it says. The AMT fea­tures dif­fer­ent tax rates than the nor­mal in­come tax struc­ture and de­nies tax­pay­ers many pop­u­lar de­duc­tions, such as for state and lo­cal taxes, per­sonal ex­emp­tions, and ac­cel­er­ated depreciation.

If you owe more un­der the AMT than un­der the reg­u­lar tax sys­tem, you pay the AMT. The non­par­ti­san Tax Pol­icy Cen­ter es­ti­mates that about 4.8 mil­lion tax­pay­ers, about 3 per­cent of those fil­ing re­turns, will pay it in 2017, rais­ing $35 bil­lion (a bit more than 2 per­cent of in­di­vid­ual in­come tax rev­enue).

De­trac­tors note that the pro­vi­sion often tar­gets the up­per mid­dle class rather than the truly wealthy. In par­tic­u­lar, it hits many up­per-mid­dle-class fam­i­lies in high-tax states be­cause it de­nies the state and lo­cal tax de­duc­tion and per­sonal ex­emp­tions. Al­most one-third of tax­pay­ers earn­ing be­tween $200,000 and $500,000 will pay the AMT, and about 62 per­cent of those earn­ing be­tween $500,000 and $1 mil­lion will. Thanks to the de­duc­tions it tar­gets (which make a big­ger dif­fer­ence for the next-high­est brack­ets), only one-fifth of those earn­ing more than $1 mil­lion pay the AMT. For its dis­pro­por­tion­ate ef­fect on the well-off rather than the fab­u­lously rich, a truly full-throated de­fense of the AMT is im­pos­si­ble.

Yet for all its flaws and all its en­e­mies, the AMT also solves a real prob­lem. It pre­vents wealthy and well-ad­vised loop­hole-seek­ers from find­ing ways to evade taxes al­to­gether. It en­sures that some peo­ple who write off large losses still con­trib­ute their share to the na­tional trea­sury. In 2005, the AMT forced the Trumps, a tremen­dously rich fam­ily, to pay a sub­stan­tial amount in taxes.

With­out see­ing his full re­turn, it is im­pos­si­ble to know why Trump’s AMT dif­fered from his reg­u­lar tax li­a­bil­ity or why he faced the AMT when so many other very-high-in­come earn­ers did not. Pos­si­bly it’s be­cause the AMT’s cap on net op­er­at­ing losses lim­ited his abil­ity to off­set his 2005 in­come with losses in­curred in pre­vi­ous years. It’s also pos­si­ble that Trump was af­fected by the AMT’s limit on depreciation de­duc­tions, which nor­mally let tax­pay­ers who buy busi­ness in­vest­ments deduct the cost of those in­vest­ments as they lose value. The reg­u­lar tax code al­lows tax­pay­ers to re­coup those costs ar­ti­fi­cially quickly. The AMT’s depreciation sched­ules re­quire tax­pay­ers to re­cover the costs more slowly, re­sult­ing in lower depreciation de­duc­tions each year.

The up­per mid­dle class can sur­vive the bur­dens of the AMT. For one thing, it’s less of a has­sle than it used to be: When tax­pay­ers and their ac­coun­tants cal­cu­lated tax li­a­bil­ity by hand, the re­cal­cu­la­tions re­quired by the AMT were un­der­stand­ably difficult. But for many tax­pay­ers to­day, it’s not hard for Tur­boTax to crunch th­ese fig­ures. For an­other thing, a house­hold with in­come greater than $207,000 is now in the top 5 per­cent of earn­ers. Th­ese Amer­i­cans don’t need spe­cial con­sid­er­a­tion.

Ul­ti­mately, the rea­son the AMT plagues the up­per mid­dle class is that the reg­u­lar taxes im­posed on them are his­tor­i­cally low. Pro­posed in­come tax cuts would only ex­ac­er­bate this prob­lem. That’s why re­peal­ing the AMT is so difficult. Un­til we can re­form our reg­u­lar tax code in ways that more eq­ui­tably raise rev­enue, it’s also what makes re­peal­ing the AMT a bad idea.

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