(FORTUNE Small Business) – Imagine for a moment that your local police set out to trap a few wily burglars but wound up clumsily ensnaring you and others - the town's shopkeepers, factory owners, and doctors. Then town officials discover they can make so much money from fines on their ever-growing population of jailbirds that they allow the burglar traps to remain in place forever.

That, in essence, is what is happening to the nation's tax system, thanks to the alternative minimum tax, or AMT. A once-obscure feature of the tax code created in 1969 and aimed at fewer than 200 wealthy families who had managed to avoid paying federal income tax, the AMT has failed at its original mission and now snags growing millions of upper-middle- and middle-income Americans. The income threshold that qualifies one as wealthy was never pegged to inflation, so today taxpayers earning as little as $75,000 can run afoul of the AMT.

While it is thought of as a tax on individuals, the AMT stealthily strikes harder at small-business owners than at wage earners. Why? For starters, successful entrepreneurs tend to earn more. And 90% of small businesses have their profits taxed as personal income, regardless of whether the firm is organized as an S Corp., LLC, or unincorporated business. In addition, when an entrepreneur's income carries him into AMT land, some business deductions are not allowed. On average, those affected by the AMT paid $6,000 more in federal income taxes in 2004 than they would have under the standard calculation.

Last month the President's Advisory Panel on Federal Tax Reform recommended that the AMT be eliminated, blasting it as a "complex, unfair, and inefficient burden on millions of Americans." But comprehensive reform of the tax is unlikely. Democrats and Republicans alike share an addiction to the swelling injection of cash that the AMT generates: $38 billion in 2005, and projected to rise to $105 billion by 2009. The beauty of the AMT to Congress and the President is that at 36 years of age, it can be blamed on few sitting politicians. Yet the revenue it generates allows Washington to spend more on everything from Medicare to pork-barrel bridge projects, and to cut other taxes to benefit favored constituents, especially those at the highest levels of affluence and influence.

The rules of AMT calculation are maddeningly complex. In a nutshell, you must calculate your taxes twice, once the regular way and again under the rules of the AMT, which target taxpayers deemed to be taking too many deductions. Whichever method produces a higher tax bill is the method you must use.

While every taxpayer is supposed to make the dual calculation, the AMT mainly hits those who gross $100,000 a year or more and whose Schedule A includes deductions for such items as dependents, state and local taxes, mortgage interest, and medical bills. (As one economist joked, "How do you avoid paying AMT? Give away your kids.") Those living in states with high taxes and real estate prices, such as California and New York, are more likely to be hit by the AMT. Ironically, a big reason the AMT is snagging more and more Americans is that while the federal tax cuts of 2001 and 2003 lowered marginal tax rates significantly, AMT rates remained unchanged.

Business owners are smacked harder by the AMT for several reasons. Households headed by a business owner are four times more likely to earn $100,000 than those headed by regular wage earners, according to a 2001 study funded by the SBA. Most business deductions are allowed under AMT, but several are not, including accelerated depreciation of new machinery or equipment. "It's a significant problem for a growing company," says Martin Janowiecki, a partner in the Private Company Services practice of PricewaterhouseCoopers. Net operating losses from operating a business also are limited by the AMT.

Ten years ago only 700,000 taxpayers were affected by the AMT. That number will swell to four million in 2005 and 22 million in 2006 unless Congress reforms the tax law or (more likely) extends a temporary legislative "patch" to limit the AMT's reach. By 2010, according to the Urban Institute Tax Policy Center, half of taxpayers earning between $75,000 and $100,000 will be hit. But only 35% of those earning $1 million or more a year will be affected, mainly because the AMT's rates are lower than the highest top marginal rate, and because the AMT ignores the generous tax treatment granted in recent years to capital gains and dividends.

Business owners Patti and Harold Waters of Taylors, S.C., this year have sold record quantities of class rings and other graduation supplies, and hoped to add an employee to their staff of six. Then Harold, 53, came back from a meeting with the couple's accountant. "After some cussing, he said that thanks to the AMT, we would owe an additional $2,100 for 2005," says Patti, 50. "We were already paying a gracious plenty. How could they want even more?" The Waterses had been hit by the AMT for the first time. But it probably won't be the last. And they are about to have a lot of company.

Imagine for a moment that your local police set out to trap a few wily burglars but wound up clumsily ensnaring you and others--the town's shopkeepers, factory owners, and doctors. Then town officials discover they can make so much money from fines on their ever-growing population of jailbirds that they allow the burglar traps to remain in place forever.

That, in essence, is what is happening to the nation's tax system, thanks to the alternative minimum tax, or AMT. A once-obscure feature of the tax code created in 1969 and aimed at fewer than 200 wealthy families who had managed to avoid paying federal income tax, the AMT has failed at its original mission and now snags growing millions of upper-middle- and middle-income Americans. The income threshold that qualifies one as wealthy was never pegged to inflation, so today taxpayers earning as little as $75,000 can run afoul of the AMT.

While it is thought of as a tax on individuals, the AMT stealthily strikes harder at small-business owners than at wage earners. Why? For starters, successful entrepreneurs tend to earn more. And 90% of small businesses have their profits taxed as personal income, regardless of whether the firm is organized as an S Corp., LLC, or unincorporated business. In addition, when an entrepreneur's income carries him into AMT land, some business deductions are not allowed. On average, those affected by the AMT paid $6,000 more in federal income taxes in 2004 than they would have under the standard calculation.

Last month the President's Advisory Panel on Federal Tax Reform recommended that the AMT be eliminated, blasting it as a "complex, unfair, and inefficient burden on millions of Americans." But comprehensive reform of the tax is unlikely. Democrats and Republicans alike share an addiction to the swelling injection of cash that the AMT generates: $38 billion in 2005, and projected to rise to $105 billion by 2009. The beauty of the AMT to Congress and the President is that at 36 years of age, it can be blamed on few sitting politicians. Yet the revenue it generates allows Washington to spend more on everything from Medicare to pork-barrel bridge projects, and to cut other taxes to benefit favored constituents, especially those at the highest levels of affluence and influence.

The rules of AMT calculation are maddeningly complex. In a nutshell, you must calculate your taxes twice, once the regular way and again under the rules of the AMT, which target taxpayers deemed to be taking too many deductions. Whichever method produces a higher tax bill is the method you must use.

While every taxpayer is supposed to make the dual calculation, the AMT mainly hits those who gross $100,000 a year or more and whose Schedule A includes deductions for such items as dependents, state and local taxes, mortgage interest, and medical bills. (As one economist joked, "How do you avoid paying AMT? Give away your kids.") Those living in states with high taxes and real estate prices, such as California and New York, are more likely to be hit by the AMT. Ironically, a big reason the AMT is snagging more and more Americans is that while the federal tax cuts of 2001 and 2003 lowered marginal tax rates significantly, AMT rates remained unchanged.

Business owners are smacked harder by the AMT for several reasons. Households headed by a business owner are four times more likely to earn $100,000 than those headed by regular wage earners, according to a 2001 study funded by the SBA. Most business deductions are allowed under AMT, but several are not, including accelerated depreciation of new machinery or equipment. "It's a significant problem for a growing company," says Martin Janowiecki, a partner in the Private Company Services practice of PricewaterhouseCoopers. Net operating losses from operating a business also are limited by the AMT.

Ten years ago only 700,000 taxpayers were affected by the AMT. That number will swell to four million in 2005 and 22 million in 2006 unless Congress reforms the tax law or (more likely) extends a temporary legislative "patch" to limit the AMT's reach. By 2010, according to the Urban Institute Tax Policy Center, half of taxpayers earning between $75,000 and $100,000 will be hit. But only 35% of those earning $1 million or more a year will be affected, mainly because the AMT's rates are lower than the highest top marginal rate, and because the AMT ignores the generous tax treatment granted in recent years to capital gains and dividends.

Business owners Patti and Harold Waters of Taylors, S.C., this year have sold record quantities of class rings and other graduation supplies, and hoped to add an employee to their staff of six. Then Harold, 53, came back from a meeting with the couple's accountant. "After some cussing, he said that thanks to the AMT, we would owe an additional $2,100 for 2005," says Patti, 50. "We were already paying a gracious plenty. How could they want even more?" The Waterses had been hit by the AMT for the first time. But it probably won't be the last. And they are about to have a lot of company.