Once upon a time, before the major tax reform which passed in 1986, many affluent tax payers used “tax shelters” to reduce their taxable income to a low amount. A doctor with wages of $250,000 would buy a partnership interest in newly built One Wilshire Boulevard. The building would be bought with 10% down with the cost depreciated over 15 years. $200,000 invested might generate a net tax deduction of $132,000 even tho the value of the building rose $150,000. Other itemized deductions and personal deductions might lower taxable income another $60,000 so tax would apply only to $58,000, taxed at a much lower rate than otherwise would apply. The AMT would limit the total amount deductible so the doctor paid a higher amount than the normal tax on $58,000. The doctor was forced to pay an alternative minimum tax to limit how low he could drive his taxable income.
When inflation was high as it was then delaying tax payments until the building was sold valuable. A depreciation deduction was included back into income when the building was sold for more than it cost but the ability to defer tax on that depreciation for 10 years might be worth 50% of the deduction because the unpaid, deferred tax could be invested in US Govt bonds paying 10% tax free interest per year.
This distorted economic investments. Dallas was full of empty high rise office buildings which could make economic profit even if they were vacant. It was unfair because doctors did not have to pay a fair tax rate and economically dumb. Investors were buying the buildings with tax deductions rather than real money. Building empty buildings did not help the economy in the long run.
The exemptions from the alternative minimum tax were not increased over time so inflation caused more and more people to be caught by the tax over time. At first only few made enough income to be caught. Over time a higher and higher percentage were caught. Repealing the AMT will lower the taxes paid by the affluent who use tax advantaged investments, bringing back unfair tax reductions in investments not generating real economic gains for the economy, tho not as much as when inflation was 8% a year.
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