Why Do We Need A Millionaires’ Tax When We Have The AMT?

“I reject the idea that asking a hedge fund manager to pay the same as a plumber or a teacher is class warfare. It’s just the right thing to do… This is not class warfare. It’s math. The money’s gonna have to come from someplace.” – President Obama speaking in the Rose Garden today

Today, President Obama unveiled a plan to reduce the deficit by $4 trillion and pay for the new round of economic stimulus, the American Jobs Act, he sent to Congress last week. In a Rose Garden speech about the plan, the President repeatedly emphasized the idea that spending cuts need to be balanced with tax increases. What will likely be one of the most controversial  elements of the plan is Obama’s proposal that individuals making over $1 million pay a certain minimum tax rate. Nicknamed the “Buffett Rule” after Warren Buffett’s advocacy of higher taxes for the super-rich, the proposal aims to rectify the fact that, due to the quirks of our tax system, some ultra-wealthy individuals pay lower effective tax rates than upper-middle income households.

Some of you may be scratching your heads, wondering, don’t we already have a tax that’s designed to ensure the wealthiest households pay a certain minimum tax rate? Why, yes we do: the Alternate Minimum Tax or AMT. Individuals with income above a certain threshold have to calculate what they owe under the AMT, which has a different set of rules than the regular income tax system, and then pay whichever is greater, their regular income tax or the AMT.  Why do we need a millionaires’ tax if we have the AMT? Simply put, the AMT is not achieving its intended goals. Continue reading