Do you agree or disagree explain your answer 14 364

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: selling side). If a tax is placed on one side of the market, it can affect the other side. Do you agree or disagree? Explain your answer. 14 (364-389) EMC Chap 14 11/18/05 10:58 AM Page 369 The Alternative Minimum Tax The alternative minimum tax (AMT) is a tax that some people have to pay on top of their regular income tax. The original idea behind the tax was to prevent persons with high incomes from paying little or no taxes because of their claiming certain tax benefits. Congress enacted the AMT in 1969 following testimony by the secretary of the Treasury that 155 people with adjusted gross income above $200,000 had paid zero federal income tax on their 1967 tax returns. How It Works The name—alternative minimum tax— comes from the way the tax is designed to work. In short, for a given income, a minimum tax is computed; then, if you are paying at least that amount of taxes, you don’t pay the alternative minimum tax, but if you are not paying at least that amount, you do. Suppose the minimum amount of taxes usually paid by a person earning $75,000 a year is $15,000. This $15,000 becomes the benchmark against which others are measured. If Smith, who earns $75,000, is not paying at least $15,000 in taxes, then he is subject to the alternative minimum tax. If Jones, who earns $75,000, is paying at least $15,000 in taxes, then he is not subject to the alternative minimum tax. Why It Is Affecting More People When the alternative minimum tax was first put into place in 1969, fewer than 1 percent of all taxpayers were affected by it. Today, more than 3 percent pay AMT. If the alternative minimum tax retains its current structure, 20 percent of taxpayers, or 30 million Americans, will be subject to it by 2010. By 2015, the AMT will affect 50 million people. What happened? Why have so many more people fallen under the umbrella of the alternative minimum tax in recent years? Two factors are responsible. Inflation The first is inflation. Because of inflation, individuals find that their dollar incomes increase. Think of it this way: A person sells apples at 20 cents each. Inflation raises the prices of most goods, including apples, which rise to a price of 30 cents each. Before inflation, the apple seller received an “income” of 20 cents an apple; now she receives an “income” of 30 cents an apple. The regular income tax is adjusted for inflation; the government doesn’t simply look at your higher dollar income and conclude that you are better off because of it. Government realizes that although you have a higher dollar income, prices are higher too, and your higher dollar income might not buy you any more at the higher prices than your lower dollar income bought you at lower prices. Even though the regular income tax is adjusted for inflation, the AMT is not. When inflation raises a person’s dollar income, it moves him upward toward the income level at which the alternative minimum tax kicks in. Tax Cuts The second factor causing more people to be subject to the AMT is the income tax cuts in 2001 and 2003. We realize this statement sounds odd, but keep i...
View Full Document

This document was uploaded on 01/16/2014.

Ask a homework question - tutors are online