The alternative minimum tax is a quirky feature of the tax code that dates from 1969. It came about because the Treasury secretary informed Congress that 155 very wealthy taxpayers owed no income tax in 1966. Lawmakers then created a special tax regime that excluded most deductions and hit capital gains more heavily. From those 155 taxpayers, the AMT has grown to affect more than 5 million taxpayers a year.
Including, of course, President Trump. When Rachel Maddow announced on MSNBC that reporter David Cay Johnston had obtained a copy of Trump's 2005 tax return, it set off a flurry of speculation about what it might contain. It turned out that there wasn't all that much of interest in Trump's return. No evidence of secret deals with Russia. No proof of conflicts of interest. And he even paid quite a bit of tax (despite boasting during the campaign that he paid nothing or next to nothing). The president paid $5.3 million in income taxes and $33 million in AMT on about $150 million in income, for a total tax rate of about 25 percent. That isn't even as scandalous as former Republican nominee Mitt Romney's rate in the low teens.
Why did Trump, with such a high income, owe so little in income taxes? It appears to be because of a deduction for a conservation easement. He reported $103 million in deductible losses. That could include about $15 million for a conservation easement, and the portion of the huge loss that previously leaked Trump returns revealed. The president claimed that he also had a lot of depreciation, presumably of real estate assets.
Without the AMT, Trump might have paid an effective tax rate of as little as 3 percent. That would put Romney to shame and rival even Apple, Google, and pharmaceutical companies. So here the AMT worked like it was supposed to. A very wealthy taxpayer had deductions that offset most of his income, so to ensure that some tax was paid, the AMT kicked in.
However, the AMT doesn't always work so smoothly. For years, a failure to index the tax to inflation threatened millions of taxpayers. Congress finally permanently patched the tax in 2012, but the AMT's reach continues to grow. It can hit upper-middle-income earners who have a lot of children, for example -- not exactly the target taxpayer. According to the Urban-Brookings Tax Policy Center, "Because the AMT disallows the state and local tax deduction and dependent exemptions, families with children who live in high-tax states are among the most likely to owe AMT. Allowing the state and local tax deduction and dependent exemptions for AMT purposes would reduce the number of households affected by the AMT from 4.8 million to just 525,000 in 2017."
Republicans, however, aren't interested in another patch like the center proposes. It's already been widely reported that Trump and his allies in Congress want to completely eliminate the tax. The House Republican blueprint would do just that. When Trump releases his own tax reform plan, AMT repeal will almost certainly be a part of it. Republicans argue that the tax overreaches, is too complicated, and undermines the income tax system.
And to an extent they're right. The AMT is an oddity. But the president's own returns show why we need it (or at least something like it). If the income tax system is going to grant so many generous deductions, there is always a chance (a very good chance in fact) that wealthy taxpayers will find ways to exploit those deductions. Something like the AMT prevents those maneuvers. If Congress wants to totally get rid of an AMT, it almost has to drastically scale back individual deductions. So far, Republicans have shown an extreme unwillingness to do that, so the need for an AMT remains.
The AMT prevents someone who earned $150 million, for example, from owing just 3 percent in taxes.