White House Budget Cites Need for Tax Reform

In his 2007 proposed budget, President Bush urged the Congress to make permanent the tax cuts passed in 2001 and 2003. Also included in the budget were other proposed tax law changes. They include clarifying the uniform definition of a child, simplifying eligibility requirements for the Earned Income Tax Credit (EITC) and the complexity surrounding the refundable child tax credit, measures to crack down further in IRS enforcement, and once again temporary AMT relief. But specifically with regards to AMT, the budget goes further than just supporting the temporary fix and addresses the fundamental need for comprehensive tax reform – from Treasury:

The President’s FY 2007 Budget proposes to temporary provisions in current law for one year, through 2006, to address the rapid rise in the number of taxpayers affected by the AMT in the near term. The Administration believes that a longer term solution to the problems associated with the individual AMT should be addressed within the context of fundamental tax reform.

The alternative minimum tax (AMT) imposes substantial burdens upon taxpayers who were not the originally intended targets of the individual AMT. A temporary provision, effective through 2005, increased the AMT exemption amounts to $40,250 for a single taxpayer, and $58,000 for a married couple filing a joint return. Beginning in 2006, the AMT exemption amounts decline to $33,750 for a single taxpayer, and $45,000 for a married couple filing a joint return. Another temporary provision effective through 2005, permits nonrefundable personal tax credits to offset both regular tax and the AMT.

Without any change in the tax law, the number of taxpayers subject to the AMT would increase by 20.4 million (from 5.5 million in 2005 to 25.9 million in 2006). Click here to read the full 2007 budget put forth by the White House.

The best solution to the growing problem of AMT and the complexity nightmare it would create for many more Americans is comprehensive tax reform. Create a tax system that has a broad income base and few deductions and there would be no need for a parallel system like AMT. Passing into law a patch each year and waiting until the last minute to do so as part of the political process only creates uncertainty for taxpayers. Stability, simplicity, and efficiency are three crucial components of good tax policy, all of which are lacking in our current system.