June 27, 2007

A Progressive AMT Fix Without Higher Tax Rates

Gerald Prante

Gerald Prante

Download Special Report No. 157

Special Report No. 157

New “fixes” to the growing Alternative Minimum Tax (AMT) raise tax rates dramatically, and some current plans even dredge up a bad idea from Vietnam War days—surtaxes. There is a better way.

Instead of raising rates on income that we’re already taxing, we should start taxing income that is currently tax-free. With this approach, we can spare the middle class the burden of the AMT and at the same time lower their other tax rates, all the while collecting the same revenue.

Every AMT fix put forth thus far that fits the new pay-as-you-go rules makes the overall tax system more progressive, and in this report, we put forth a proposal that does just that—but without raising statutory tax rates. It is a four-year plan that will get us to 2011 when the Bush tax cuts expire. It would give the nation three years to design a more fundamental tax reform that should build on this theme: taxing previously untaxed income, which permits more moderate tax rates overall.

This is the theme of every sound tax reform: a broader tax base with lower rates.

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Gerald Prante

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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 surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services.

The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.