Next week, the President's Advisory Panel on Federal Tax Reform will issue its report. According to press leaks, its principal recommendation will be to eliminate the Alternative Minimum Tax and pay for it by scaling back deductions for mortgage interest, state and local taxes, and health insurance. This is necessary because President Bush mandated that the commission's proposals be revenue-neutral -- neither raising nor lowering aggregate federal revenues.
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.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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