Almost all
economists on both the left and the right decry the AMT and welcome
its abolition. It is complicated and time-consuming to calculate,
and increasingly affects those in the lower and middle classes
who were never meant to bear its burden. This results from the
fact that the income threshold that triggers the AMT has not been
increased permanently since the tax was imposed in its current
form in 1986. Over the years, inflation, real growth and various
tax cuts have exposed more and more taxpayers to it.
The AMT
is truly an alternative tax system that operates in parallel with
the regular income tax. It is a kind of flat-rate tax system with
just two brackets, 26 percent up to $175,000 of income and 28
percent on the balance. The base of the AMT is broader than that
of the income tax. For example, one loses deductions normally
allowed for state and local taxes and interest on home-equity
loans. There is an exclusion of $58,000 for married couples filing
jointly and $40,250 for single persons. Unless Congress acts,
however, these thresholds will fall next year to $45,000 and $33,750,
respectively.
According
to Congress' Joint Committee on Taxation, in the absence of legislative
action, the percentage of taxpayers affected by the AMT will rise
from 2.7 percent this year to 13.9 percent next year and continue
rising to 20.4 percent in 2010. Net federal revenue from the AMT
will rise from $20.7 billion this year to $109.6 billion by 2010.
According
to a Treasury Department fact sheet prepared for the tax commission,
revenues from the AMT are rising so rapidly that by the year 2013,
it will raise more gross federal revenue than the regular income
tax. However, this assumes that AMT income thresholds fall as
scheduled and that existing tax credits can be applied against
the AMT. Elimination of the tax credits would cause AMT revenues
to exceed the income tax several years sooner.
Clearly,
the easy thing to do is support elimination of the AMT. It is
stupid to have two separate tax systems operating simultaneously.
However, I think the tax commission missed an opportunity to use
the AMT creatively to implement radical tax reform. Instead of
keeping the regular income tax and getting rid of the AMT, the
commission should have considered getting rid of the income tax
and keeping the AMT.
This is
not a new suggestion. As long ago as 1983, Yale University tax
professor Michael Graetz suggested that the AMT might form the
basis for a kind of flat rate tax system that could eventually
replace the income tax. In 1986, flat-tax pioneers Robert Hall
and Alvin Rabushka of Stanford's Hoover Institution wrote an article
for The Wall Street Journal suggesting something similar.
More recently,
Graetz updated his proposal. In a 2002 article in the Yale Law
Journal, he proposed a plan that basically involved getting rid
of the income tax, keeping a version of the AMT and replacing
the lost revenue with a value-added tax, a kind of sales tax.
The result, he said, is that the vast majority of Americans would
not have to file tax returns or pay any income tax at all.
In August,
Urban Institute scholars Len Burman and David Weiner published
a discussion of the idea of keeping the AMT and abolishing the
income tax in a paper titled, "Suppose They Took the AM Out
of the AMT?" They point out that the main drawback is elimination
of the Earned Income Tax Credit, which gives many low-income workers
a negative tax rate -- that is, they pay no income taxes but get
a "refund" from the government anyway. This is also
the main problem with the flat tax -- even imposing a zero tax
rate would constitute a tax increase for many people.
Burman and
Weiner report that abolishing the income tax and keeping the AMT
would reduce average and marginal tax rates for most tax filers.
The average marginal rate would fall from 24.7 percent to 23.4
percent, and from 34.4 percent to 27.9 percent on those at the
top.
