Alternative Minimum Tax Stalks Millions of Taxpayers

Published November 1, 2003

There is certainly some ironic justice in recent revelations that millionaire columnist-turned-politician Arianna Huffington paid no income tax to the state of California and only $771 in federal taxes in 2001 and 2002.

Huffington has been a leading proponent of making sure successful individuals and all corporations pay “their fair share.”

For instance, in announcing her short-lived run for the California governorship, Huffington opined, “let’s close the loopholes that allow corporations to avoid paying their fair share of taxes by hiding their profits in tax shelters. To do any less is a slap in the face of all the hard-working taxpayers being forced to dig deeper and deeper into their pockets so the well-connected can pad their bottom line.”

Huffington claims her tax situation bears no resemblance to those she has preached about. Her company–Christabella Inc.–had large losses that offset her personal income. It is fair and right that she had only a limited tax liability.

Many of Huffington’s class warrior allies believe situations such as hers call for “cracking down” on those who aren’t paying their “fair share.” In fact, those same voices have convinced the federal government to maintain an alternate set of rules for individuals and companies who–like Huffington–may have legitimate deductions that make their tax liability negligible.

AMT Means Complexity

This second set of tax rules is called the Alternative Minimum Tax (AMT). The logic behind the AMT is that if you don’t pay “enough” under one set of rules because of legal deductions, then you should be saddled with a second set of tax rules.

The AMT isn’t airtight–otherwise Huffington would have had some very big tax bills during the past couple of years. Yet many other Americans were less fortunate. The AMT, originally aimed at fewer than 200 taxpayers when it was created in 1969, now threatens to become the bane of millions.

By 2010, one-third of all taxpayers in America will have to fill out a second form and comply with a second set of tax rules. Many will be people of modest incomes who don’t live in $7 million Brentwood estates, as does Huffington. Most of those taxpayers, in fact, will make less than $100,000 per year. According to a U.S. Treasury Department study by economist Robert Rebelein, more than half of all families with three or more children will be subject to the AMT.

The AMT adds tremendous complexity to the tax code. Taxpayer Advocate Nina Olson calculates the AMT adds 12 hours of work to the job of preparing a single tax return. The AMT also increases the tax burden on American families and corporations. Of course, increasing the tax liabilities of corporations is an illusion. Those taxes get passed through to workers, shareholders, and consumers.

There should be one set of tax rules, and if misfortune or particular economic circumstances determine an individual or company has little or no tax liability, so be it. If people or companies are taking deductions that have little economic or social justification, the solution is not the AMT. Rather, these deductions should be the first that are jettisoned to make way for lower tax rates.

Ms. Huffington, it’s OK that you didn’t owe any income taxes over the past two years. Sometimes circumstances temporarily drive down the tax liabilities for corporations and individuals. Will you and your allies now admit the same should be true for all Americans?

John Berthoud is president of the 350,000-member National Taxpayers Union. His email address is [email protected].