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Buffett Tax Rule: The New AMT

Today’s a big day for the deficit hunters as President Obama will be proposing a variety of tax changes (here’s a sneak peek from the NY Times [3]). The most notable of these change is the introduction of a new tax rate for people earning more than $1 million a year. At the moment, the top tax bracket [4] is $379,150. Unfortunately, President Obama hasn’t given details on what the rate should be, what it should affect, and has left that as a task to Congress as part of a larger effort to revamp the tax code.

It sounds a little like the AMT. When the Alternative Minimum Tax was enacted in 1982 (the version that is in existence today), it was designed to make sure that the super wealthy paid a minimum tax, despite all the taxation “options” (read: chicanery) they could employ. Today, the AMT is pilloried annually because it was never indexed to inflation. What was considered rich in 1982 is not considered middle class and so every year Congress needs to put a band-aid on the problem so that more and more people are unjustly ensnared.

The difference here is that the AMT excludes and limits certain deductions and credits when you exceed a certain threshold. This sounds like we’re just introduce a new tax bracket at the higher end. Tax brackets are adjusted for inflation annually so this avoids the inflation problem that plagues the AMT.