Tax Analysts Blog

Trump's Leaked Return Shows Why We Need an AMT

Posted on Mar 20, 2017

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.  

Read Comments (5)

Edmund DantesMar 21, 2017

Trump had $100 million in business losses. No one has argued that those losses were faked. They were real economic losses, apparently incurred in a prior year.

Why does the AMT ignore real economic business losses? That is fundamentally unfair. In round numbers, Trump paid $38 million in taxes on $50 million of actual net income. That's a tax rate of 76%. I think that is far too high.

" If the income tax system is going to grant so many generous deductions, "

There's your problem. We need to end deductions for personal consumption spending. No charitable deductions, for example. No more tax-free munis. No more tax-exempt endowments. A few more changes along these lines and we can consign the AMT to the dustbin of history. Where it belongs.

Mike55Mar 21, 2017

"Why does the AMT ignore real economic business losses? That is fundamentally unfair."

I'll provide the counter-argument, even though I personally deem it both misguided* and irrelevant.** AMT was not designed to ignore any one specific preference item. AMT was instead designed to prevent the use of too many preference items in one year. So Trump can have his business losses and accelerated depreciation and conservation easements and NOL carry forwards, he just can't have them all at once. This prevents a taxpayer from "piling on" in such a manner they never pay any tax.

*Misguided for the exact reasons you set out in your final paragraph.

**Irrelevant because over the past several decades the abstract theory behind the AMT has diverged from its real-world impact. The AMT is now a tax on multiple kid households in high tax states with an income level between $200K and $1M. That's where all the money comes from, not guys like Trump.

Mike55Mar 21, 2017

Trump's case is an exception, not the rule. As a rule the AMT impacts households earning between $200K and $1M per year. The wealthy contribute very little total AMT revenue.

I actually have no problem with the AMT itself. Having kids was a choice, and continuing to live in a high tax state is an ongoing choice (i.e., the two key AMT variables). At some income level it stops making sense for others to subsidize my choices, so the AMT serves as a decent rough justice solution.

In contrast, suggesting I should pay AMT as a sort of Trump-Tax-Avoidance insurance policy makes very little sense. Even if we assume that's a valid policy goal in the first place, there's no correlation between the benefit achieved and the cohort selected to bear the cost. For example: How does Trump paying 3% harm those with multiple kids more than the childless? How does Trump paying 3% harm people in high tax states more than low tax states? How does Trump paying 3% rate stop harming people once they cross the $1m threshold? These are the sorts of questions you'd need to answer for your argument to hold together.

Travis RechMar 22, 2017

In fairness, I think Jeremy is arguing for AN amt, not THE amt. Clearly there are flaws in our tax system such that we need some way to ensure that wealthy people don't avoid paying meaningful taxes on their real income, and I think most everyone agrees the actual AMT we have is not the ideal solution. I don't think Jeremy is blind to that, so I give him the benefit of the doubt here and assume he is arguing for some form of revised AMT and not defending the current AMT.

Mike55Mar 22, 2017

That's definitely a fair point Travis, supported by the "or at least something like it" parenthetical. However, I think my arguments would apply to any AMT, not just the AMT. All that would really change is the specific income values.

The challenge is that, as a group, wealthy tax avoiders have nowhere near as much income as the upper-middle-class and "sorta rich" types who pay the AMT. This means you cannot plug the massive 2-3 percent hole that removing the existing AMT would make in the budget with a new AMT that only impacts wealthy tax avoiders. You could of course scale the AMT way back, but that'd be assuming away the debate (the AMT's large scale is what makes it controversial in the first place).

I'll acknowledge that you could find some way to improve the AMT so its rhetoric-to-policy gap becomes slightly less absurd. But my fundamental point would still remain: the majority of those paying your new and improved AMT would not be wealthy tax avoiders. This means you'd still need some explanation (unrelated to Trump's 2005 return) for why those people are paying an AMT.

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