IN THE 1960s, the Treasury Department began issuing reports showing the tax code was so porous that many upper-income households were able to legally avoid paying income taxes altogether. A Congress more embarrassed than contrite adopted a minimum tax, the gist of which was that, no matter how smart his tax lawyer, a person had to pay a minimum amount.
The minimum tax was a second net meant to catch most if not all of those who managed to wriggle through the basic code. It has since been changed several times. The present version, called the alternative minimum tax, mostly dates from the tax reform act of 1986. As often happens in taxation, the goal is noble but the design is flawed.
The principal defect is that the provision wasn't indexed to take account of steadily rising incomes. It was meant to apply to people at high income levels taking advantage of some of the more exotic shelters in the code. But because the threshold at which the tax begins to apply was not adjusted for inflation, more and more people are finding that their "minimum" tax is higher than their regular tax. The minimum has begun to reach down into the lowest tax bracket, and to reduce the value of widely available preferences such as the children's and education tax credits voted a couple of years ago and the long-standing dependent care tax credit.
Congress has now voted to ease this unintended effect. One of the bills the members passed on their way out of town last month would keep the minimum tax from eating into the value of these and certain other credits. That buys some time but doesn't solve the basic problem.
The minimum tax ought to be indexed so as not, over time, to supplant the basic income tax. The problem with that is its paper cost. Current revenue estimates for, say, the next 10 years are based on existing law. Until Congress does otherwise, the estimators have to assume that the tax won't be indexed and will therefore come to apply to more and more people, raising their liability. An indexation bill would thus be scored as "costing" the government billions of dollars in future revenue that it was never Congress's intent to collect, and under the budget rules the cost would have to be made up by an offsetting tax increase, a spending cut or an agreement to settle for a lower surplus than otherwise. Who wants to do that?
The minimum probably ought to be rebalanced in other respects as well. As presently drawn, it threatens to erode the value of relatively minor preferences such as the dependent care credit while leaving untouched such blockbuster preferences as the exclusion from income of employer-paid health insurance premiums and the deduction for mortgage interest.
If Congress really wants to impose a minimum tax on income broadly defined, surely it ought to encompass major items such as these. But that, too, would constitute a tax increase, not exactly what this Congress has in mind. So they fiddled with the minimum instead. Still, the fiddling was an improvement over prior law.