The perverse AMT

Buried in the AMT is the perverse way of computing the exemption, in addition to the disallowing of the deduction of state and local taxes (including real-estate property taxes). One starts with an exemption of $40,250 but subtracts from this value 0.25 of the difference between the AMT income and $112,500 (single). That is, any income one makes above $112,500 is effectively taxed not at the advertised rate of 28%, but marginally 35%. Only when one’s AMT income exceeds $273,500 does one exhaust his exemption, and then the marginal rate drops to 28%.

I don’t understand why there are so many discontinuities in the first derivative. All these phase-out schemes (prevalent in the regular income computation) are just tricky ways to hide the fact that the marginal rates are higher than advertised. Why can’t lawmakers be honest and just change the marginal rates rather than adding these stupid phase-outs? Complication is costly, and the hidden cost of people’s productivity is not free. Are there not any economists out there who can convince Congress that they are wasting the time of a lot of people?

In addition, these discontinuities and concavities caused by the phase-outs make optimization (i.e., tax-planning) much harder. Without a comprehensive understanding of the tax code (who has?), one can never be certain of the tax consequences of any economic decision one chooses at any point.