An Alternative Maximum Tax?

May 6, 2014

Representative David Jolly (R-FL) introduced a bill, H.R. 4512, the “Alternative Maximum Tax Act,” that would limit any, non-corporate taxpayer’s total effective tax rate to 50 percent of their AGI.

The effective tax rate is calculated by adding all the taxes (federal, state, and local) an individual, or non-corporate business paid in a year and dividing it by their adjusted gross income. The following table shows the taxes included in the calculation of the “maximum tax:”

Taxes Included in Calculation of Maximum Tax

Air transportation taxes.

Biodiesel fuel taxes.

Cigarette taxes.

Medicare tax.

Social Security tax.

Estate taxes.

Insurance taxes, including insurance premium taxes, excise taxes on comprehensive health insurance plans, and individual health insurance mandate taxes.

Federal unemployment taxes.

Garbage taxes.

Gasoline taxes.

Gift taxes.

Hotel taxes.

Import taxes.

Income tax, including city, State, and county.

Inheritance taxes.

Interstate user diesel fuel taxes.

Inventory taxes.

Liquor taxes.

Luxury taxes.

Medicare taxes.

Taxes enacted under the Patient Protection and Affordable Care Act, including the individual mandate excise tax and the Medicare tax surcharge on investment income of high earning Americans.

Tangible personal property taxes.

Real estate taxes.

Sales taxes.

Self-employment taxes.

Service charge taxes.

Sewer and water taxes.

Special assessments (city and county).

State unemployment taxes (SUTA).

Tanning taxes.

Telephone-related taxes, including telephone 911 service taxes, telephone Federal excise taxes, telephone Federal universal service fee taxes, telephone minimum usage surcharge taxes, telephone State and local taxes, telephone universal access taxes.

Tire taxes.

Use taxes (city, county, and State).

Utility taxes.

Vehicle registration taxes.

Waste management taxes.

Workers compensation taxes.

Source: H.R.4512

Although it is a worthwhile goal to bring down tax rates for individuals and businesses, this is not the way to do it. The amount of administrative burden for both taxpayers and the IRS makes this unworkable.

As a taxpayer, this will require you to tally the total amount of all of these taxes you paid throughout the year in order to determine whether you hit the 50 percent. It will also require extensive record-keeping in order to report your total tax burden to the IRS. While some of the taxes on the list, such as state individual income taxes, are straightforward to calculate and keep track of, some of these would be a lot harder to manage. Imagine having to keep track of all the sales taxes, hotel taxes, and air transportation taxes throughout the year if you happen to travel a lot.

The IRS will also need to develop rules for this tax and devote limited resources to enforcing them.

It is also worth noting that the legislation does not specify the mechanism by which the taxpayer will remain below a 50 percent effective tax rate. Perhaps the federal government could provide a credit against your federal tax burden. However it is done, it will be another provision added to an already complex tax code.

If decreasing the tax burden on those taxpayers who face 50 percent effective rates or higher is a priority, lowering existing tax rates would get the job done without adding any more complexity.

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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

A gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax.

A sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.

A property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services.

An excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections.

An estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs.

An inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate.

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.