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December 01, 2004

AMT is Solution Not Problem

When people talk about tax issues, the Alternative Minimum Tax (AMT) -- the tax designed to make sure that the wealthy don't escape taxation through too many deductions -- is seen as a problem needing reform. Because the AMT was never indexed to inflation, more and more people are being brought under its provisions, which means they lose out on a range of deductions. In 2000, only 1.3 million people paid taxes under the AMT; today it's 3 million; by 1010, it is estimated that 30 million will be covered by the AMT.

But here's the odd thing, as The Economist points out, the AMT -- with its fewer deductions -- sounds a lot like what people sound like they want through tax reform:

Why not use the AMT as the vehicle for tax reform? By 2009, it will be less costly to ditch the income tax and keep the AMT than to repeal the AMT and carry on with the income tax. The AMT is far from perfect—its personal exemption is not indexed; quirks in its structure can mean high marginal rates for some taxpayers; and it allows some needless deductions—but it is less riddled with loopholes than the current income tax. Thus it is a good starting-place for base-broadening, exemption-ending reform.
I wouldn't go as far as The Economist, since the AMT only has two rates -- 26% and 28% -- so a more progressive tax structure would be more desireable.

But the irony is that the GOP and the Bush administration are attacking the AMT, even as they make noises about "tax reform." But then, real simplification of the tax system is not their goal. They are just looking to cut more taxes from the wealthy-- probably through exempting more investment income through taxation -- so the AMT is no model for them.

But the principles of the AMT, that there should be a minimum tax rate for wealthy taxpayers, should be emphasized in critiques of the Bush tax plans.

Economist.com | Economics focus

Posted by Nathan at December 1, 2004 08:38 AM