How did the Present Alternative Minimum Tax come into Existence?

Why are more and more people having to pay the Alternative Minimum Tax (AMT)? And what is it? This controversial tax was enacted as part of the Tax Reform Act of 1969 to target the rich. But because the rates were not adjusted for inflation, it now targets not only the rich but also the middle class, and there seems to be no end to the problems its causes. The New York Times reported that "by 2010, nearly 30 million taxpayers will be hit -- among them, a staggering 94 percent of married filers who have children and make $75,000 to $100,000." The Alternative Minimum Tax was designed as a parallel tax system to the federal income tax and checks it to ensure that that the people in higher tax bracket don't evade paying any taxes through loopholes.

With the AMT most tax deductions are disallowed. In 1969 the minimum tax was a 10 percent flat rate. Over the years the AMT has evolved to also include a corporate AMT; with each tax reform effort from the Carter to Clinton Administration the AMT has increased. As of the latest revision, which was passed in 1993, there is a two tier system: 26 percent and 28 percent for individuals. Here is a look back through media reports and presidential and congressional messages about the origins of the AMT in the Johnson and Nixon Administrations and its subsequent revisions in the Carter, Reagan, Bush and Clinton Administrations.

President Lyndon Johnson and the Origins of the AMT

The story of the AMT begins with the Vietnam War. The government needed to secure additional funds to finance the war which in 1968 and 1969 was at its peak. According to Sheldon D. Pollack in The Failure of U.S. Tax Policy: Revenue and Politics, the need for new revenues led the executive branch "to embrace a conception of 'tax reform' consisting in closing revenue 'leaks' and reversing the 'erosion' of the tax base concomitant to the many preferences that had crept into the tax code." In his administration's last month in office President Lyndon Johnson named Joseph Barr treasury secretary. Both Barr and Assistent Secretary of the Treasury Stanley S. Surrey instigated the proposals to tighten the tax loopholes that eventually led to the creation of the AMT.

Surrey made the Johnson Administration aware of the growing economic cost tax preferences were having on the nation's finances, coining the term “tax expenditures." Surrey spent his years as assistant secretary compiling reports about the true nature and reality of tax expenditures in the country. This work culminated in the first tax expenditure budget, which included a complete list of major loopholes in the tax code, and identified the impact they had on the government and economy.

In August 1969 as he was preparing the next year's budget Barr warned that the country faced a taxpayers' revolt. He explained, according to the Washington Post, that in 1967 there were a total of 155 individuals with incomes over $200,000 who did not pay any federal income taxes; twenty of them were millionaires. These individuals successfully used all tax loopholes available to legally evade paying taxes. The revelation attracted wide media attention and led to public shock. As he presented the next annual budget, published in the final weeks of his administration, President Johnson indicated that the problem needed to be addressed, but not by him:

We believe that in justice to the next Administration that will take office within the next month and will have to live with and administer any legislation passed, it is only appropriate that they have the opportunity to examine carefully and make their judgments to these matters.

Several possible solutions were discussed at the time including, according to anonymous sources with the House Ways and Means Committee run by Wilbur Mills, "the establishment of some sort of minimum tax on persons with large incomes who escape all taxation at present because their income is entirely from sources that receive preferred tax treatment, such as oil wells or municipal bonds." ("Tax Law changes Sought by Mills," NYT, January 1, 1969)

The Nixon Administration and the Tax Reform Act of 1969

As a result of the Surrey tax expenditures budget and Barr's revelations the Nixon Administration inherited from its predecessor a tax reform issue that needed to be dealth with. The media gave extensive coverage to the tax debate. The Washington Post reported on February 8, 1969, in a story headlined, "Bid to Tax Untaxed Hinted by Treasury":

The Nixon Administration hinted broadly yesterday that it will seek to make the rich--or least some of them to pay more taxes. "I think the American People are saying something and the message is getting through," a Treasury spokesman said, claiming that congressmen are getting a large volume of mail protesting the fact that some wealthy individuals escape income taxation altogether.

In April 1969 the Nixon Administration presented its proposal for tax reform to Congress. The measure was accompanied by this message:

Reform of our Federal income tax is long overdue. Special preferences in the law permit far too many Americans to pay less than their fair share of taxes. Too many other Americans bear too much of this tax burden. . . . We must reform our tax structure to make it more equitable and efficient; we must redirect our tax policy to make it more conducive to stable economic growth and responsive to urgent social needs. Much concern has been expressed because some citizens with incomes of more than $200,000 pay no federal income taxes. These people are neither tax dodgers or tax cheats. Many of them pay no taxes because they make large donations to worthy causes donations that every taxpayer is authorized by existing law to deduct from his income in figuring his tax bill. But where we can prevent it by law, we must not permit our wealthiest citizens to be 100 percent successful at tax avoidance. Nor should the Government limit its tax reform only to apply to these relatively few extreme cases.(NYT, April 22, 1969)

After Nixon made his proposal, the House Ways and Means Committee took up the legislation. According to Rowland Evans Jr. and Robert D. Novak (Nixon in the White House: The Frustration of Power), Chairman Wilbur Mills "did not conceive of tax reform as a device to increase revenue. His idea was that by ending special tax advantages, tax rates for run-of-the-mill taxpayers could be lowered."

In late April the committee began holding hearings on the Nixon proposals for tax reform. According to the NYT, the first week of hearings focused on "the so-called minimum tax":

The levy aims to foil wealthy people who arrange their affairs to escape taxation under the present law and everyone seems to think that's a good idea. A formula devised by Prof. Stanley S. Surrey, tax counsel to the Treasury, "would have the effect of placing a 50 percent ceiling on the amount of an individual's income that could enjoy tax-exempt status," according to the 291 page reform study prepared for President Johnson and left by him as a farewell gift to the incoming administration. (NYT, April 28, 1969)

The final legislation increased revenues and closed loopholes and tax prefernces.

1978 Reforms

The Alternative Minimum Tax that Americans are now grappling with was introduced in its present format as a result of tax reform in 1978. While the Congress rejected many of President Jimmy Carter's proposals, Congress did choose to approve tax cuts geared toward upper-income groups; these included cuts in capital gains and corporate taxes. The final legislation, the Revenue Act of 1978, featured $18.7 billion in tax cuts. The bill formally transformed the minimum tax devised in 1969 into the "Alternative Minimum Tax" and increased the percentage in taxes that individuals would be required to pay. Media reports indicated that the reductions in capital gains taxes would be offset by increases in the AMT. (Washington Post, August 3, 1978)

Ronald Reagan and the 1982 Tax Reform

In 1982 tax reform was again an issue as was the challenge of reducing an exploding budget deficit caused by the dramatic tax cuts of 1981 and increased spending for the military. Congress rejected the Reagan administration's belief in supply side economics. The chairman of the Senate Finance Committee, Bob Dole, a fiscal conservative, did not believe that reducing taxes could lead to increased revenue. Sen. Dole therefore taxes and tariffs by $105 billion over the next two years. President Reagan supported just $31.7 billion in tax increases for the same period. On the Senate floor Dole candidly defended tax hikes:

The roots of this evening's debate actually go back to February [1982], when the President [ Reagan] released a budget calling for deficits in excess of $700 billion over the next 3 years. Those deficits were unacceptable by any criteria. Do we want to reduce the deficit, do we want to continue the downward trend of interest rates, or do we want to signal to the financial markets and the people in our States that we really do not care, that we really have not quite enough courage to take this step, because some tax might affect someone in our constituency?

The media seized on Dole's statement. A headline in the Washington Post declared: "Republicans Eye Bigger Tax Increase" (March 11, 1982) The story noted:

Dole listed a number of tax changes which he has already publicly endorsed or signaled support for. These include an Alternative Minimum Tax for corporations and individuals, raising $4 billion in 1983 and $8 billion in 1984. Wealthy individuals who pay little or no tax would be required to add back all deductions, take a $50,000 exemption, and then pay a tax set at 15 percent of the remaining income.

The tax reform efforts resulted in the Tax Equity and Fiscal Responsibility Act of 1982, which included revenue enhancement methods including the creation of a minimum corporate tax.

Deficit Reduction Act of 1984

Despite the tax increases of 1982, the deficit continued to grow and again became a hot issue when the 1984 budget was being drafted. Once again Dole took the lead in proposing higher taxes. But in November 1983 the Senate approved a tax bill that fell short of the fresh taxes that Sen. Dole had originally called for. But in March 1984 the House Ways and Means Committee approved $49.3 billion in tax increases, which were to go into effect gradually over four years. The main elements of the committee's proposals were later signed by President Reagan. The bill was an effort by both chambers of Congress to reduce the federal budget deficit. Sen. Daniel Patrick Moynihan also made a proposal to increase the Alternative Minimum Tax and raise $1.2 billion in revenues. His proposal, according to the NYT account publ;ished on March 2, 1984, broadened the "deductions affected by including losses claimed by taxpayers from investments made with the aim of reducing taxes."

The resulting Deficit Reduction Act of 1984 included significant income tax provisions.

The 1986 Tax Reform Act

In 1986 Congress approved a major reform of the tax code proposed by President Reagan, Sen. Bill Bradley and others. Once again the Alternative Minimum Tax was included in the final tax package. In addition, Congress approved a Corporate Alternative Minimum Tax.

Years later investigative journalists Barlett and Steele, writing in the Philadelphia Inquirer (October 1991), revealed that the AMT of 1986 actually reduced taxes on the wealthy:

When Congress enacted the Tax Reform Act of 1986, lawmakers hailed its alternative minimum tax provision as the most stringent ever, guaranteeing that nobody would ever escape paying at least some tax . . . [But] passage of "the toughest minimum tax ever' resulted in a 75 per cent drop in the number of people who paid the tax, and a 90 per cent drop in the amount they paid. On average, a millionaire in 1986 paid an alternative minimum tax of $116,395. Three years later, a millionaire paid $54,758. That amounted to a 53 per cent tax cut.

1990 Tax Increase

After years of ever steeper budget deficits and a prediction by OMB director Richard Darman that the next budget deficit could reach $231 billion, Congress and the first President Bush in 1991 decided finally to stem the tide of red ink. The bill finally agreed to both Copngress and President Bush provided for $40 billion in new taxes in 1991 and $500 billion in new taxes over five years. The AMT was raised were 21 percent to 23 percent.

Revenue Reconciliation Act of 1993

The final major tax legislation of the twentieth century was approved in 1993 at the behest of the Clinton administration. On August 5, 1993 the House passed the bill by 218 to 216. The next day on August 6, after weeks of compromise, the Senate approveed the bill on a strict party-line vote. Not one Republican voted for the measure. It passed when Vice President Al Gore in his position as President of the Senate cast the deciding vote.

The measaure included yet another increase in the AMT, this time to 26 percent for people who earned between $100,000 and $175,000, and 28 percent for those who earned above $175,000.