June 27, 2007

A Progressive AMT Fix Without Higher Tax Rates

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.