The alternative minimum tax, enacted in 1970, could become a key player in the debt limit deal, much as it was in the 2009 stimulus package, according to multiple sources.

The AMT is imposed in addition to the regular tax, and was designed to ensure that rich Americans couldn’t use exemptions and deductions to remove all tax liability from themselves. However, it was poorly calculated, so over time, it hits more and more members of the upper middle class. To remedy this, practically every year, Congress creates an AMT patch, that shields taxpayers at that upper middle class level from having to pay the AMT. This is costly – it cost roughly $70 billion to do it in 2009 as part of the stimulus. But Congress has clearly shown their intent to never allow the AMT to dip that low. Many have called for a permanent AMT patch, to end the mystery and put the CBO baseline where it clearly ought to be.

As Jay Newton-Small points out, one of the debt limit deals on the table would include a permanent AMT patch equal to the level of revenue increases that Republican leaders would accept. They can then go back to their colleagues and say that the AMT fix offsets the revenue increases.

Door Number Two: a more modest package for roughly $1.7 trillion to $2.3 trillion in cuts with upwards of $500 billion in revenue increases, including $40 billion to $60 billion from ending tax breaks for corporate jets, yachts and race horses (and, possibly, a proposal to stop taxing hedge fund managers’ income as capital gains, thus subjecting it to a higher rate); plus $150 billion to $200 billion in increased revenues from requiring more pension contributions from federal employees, broadcast frequency auctions and getting rid of farm subsidies; and another several hundred billion dollars from pegging inflation to the Consumer Price Index. All of the new revenues would be offset by a permanent or long-term Alternative Minimum Tax fix, a popular bipartisan move, thus satisfying the Grover Norquists of the world. This deal would include modest Medicare cuts, but to providers only, and could also include some short term stimulus such as an employer payroll tax holiday.

If you look at what else would be in this middling deal, you have the chained-CPI, which results in both a tax increase and a Social Security benefit cut, and provider cuts to Medicare. I don’t think you can wring enough out of the AMT fix to get to the grand bargain deal, with $1 trillion in revenue solutions. In that grand bargain deal would be a pledge to move to comprehensive tax reform to lower rates and broaden the base in future years.

In other words, this is all about getting around Grover Norquist’s pledge. Since the AMT patch gets added every year, it’s hardly worth even having it around. The law assumes that the patch will expire, and revenues will increase as a result. But Congress would never do that. So this puts that fiction to bed, and increases revenues to cover the cost.

Now, that’s probably an OK deal to make if it was only about retiring the AMT. But that’s supposed to be the sweetener for trillions in spending cuts, including cuts to the social safety net like Medicare and Social Security? Under the CBO baseline, it’s a net $0 in revenue in the deal! There are savings in paying for the tax cut rather than financing it through borrowing in future years, but they’re fairly minor.

No wonder House Democrats are so furious.

Obama spoke to the media after the end of a meeting with leadership, called the talks very constructive, and promised to work through the weekend on a deal. The words “alternative minimum tax” didn’t cross his lips, but they didn’t need to.

David Dayen

David Dayen

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