Could the the AMT be the "Flat Tax"?
---
For many people, the worst thing about the Alternative Minimum Tax isn't necessarily that it makes some people pay more tax, but rather that it makes lots of people compute more tax.
If you're anywhere near the threshhold for AMT liability, then you are expected (i.e., legally required) to compute your potential tax bills under both the traditional federal income tax and the AMT. This dual-computation system has made either a professional tax preparer or tax preparation software mandatory for essentially anyone who files a return.
And as I have blogged previously, AMT liability is set to explode beginning with 2006 tax returns.
Which invites the question: Perhaps instead of scrapping the AMT, why not scrap the regular income tax instead? Does it really matter which system we use, so long as we're only using one?
This unorthodox proposal actually gains some traction when you consider that the AMT actually incorporates some elements of the flat tax / fair tax proposals being posited by people such as Steve Forbes.
Consider:
--There are, nominally, only two brackets under the AMT: 26% and 28%.
--There are generous exemptions (e.g., $33,750 for single filers).
--Most major deductions under the regular income tax are excluded under the AMT.
Well, the nonpartisan Urban Institute has analyzed the issue in more detail.
The study points out some problems with the idea of simply making everyone pay the AMT, however: there is a massive marriage penalty under the AMT, many savings-oriented credits are disallowed, and one huge deduction — residential mortgage interest, is still allowed under the AMT (note: but only for first mortgages on primary residences; the AMT disallows interest on most second mortgages and home equity loans).
And, more importantly, the biggest problem with using only the AMT is what makes the AMT a problem in the first place: the exemption and the tax brackets are not indexed for inflation (i.e., the AMT subjects taxpayers to "bracket creep"). This is precisely why AMT liability is set to explode in the next two years. Without fixing this unacceptable flaw, the AMT is simply not an option, either as a second, "supplemental tax" or as the only income tax.
I also suspect that advocating "making everyone pay the AMT" would not be politically smart, since many people still think of it as a "tax on the deadbeat rich." Still, the general framework of the AMT, if not the actual taxes it imposes, could be a useful as a prototype for a truly original "flattish tax."
This much is certain: the status quo is no longer acceptable.
If you're anywhere near the threshhold for AMT liability, then you are expected (i.e., legally required) to compute your potential tax bills under both the traditional federal income tax and the AMT. This dual-computation system has made either a professional tax preparer or tax preparation software mandatory for essentially anyone who files a return.
And as I have blogged previously, AMT liability is set to explode beginning with 2006 tax returns.
Which invites the question: Perhaps instead of scrapping the AMT, why not scrap the regular income tax instead? Does it really matter which system we use, so long as we're only using one?
This unorthodox proposal actually gains some traction when you consider that the AMT actually incorporates some elements of the flat tax / fair tax proposals being posited by people such as Steve Forbes.
Consider:
--There are, nominally, only two brackets under the AMT: 26% and 28%.
--There are generous exemptions (e.g., $33,750 for single filers).
--Most major deductions under the regular income tax are excluded under the AMT.
Well, the nonpartisan Urban Institute has analyzed the issue in more detail.
The study points out some problems with the idea of simply making everyone pay the AMT, however: there is a massive marriage penalty under the AMT, many savings-oriented credits are disallowed, and one huge deduction — residential mortgage interest, is still allowed under the AMT (note: but only for first mortgages on primary residences; the AMT disallows interest on most second mortgages and home equity loans).
And, more importantly, the biggest problem with using only the AMT is what makes the AMT a problem in the first place: the exemption and the tax brackets are not indexed for inflation (i.e., the AMT subjects taxpayers to "bracket creep"). This is precisely why AMT liability is set to explode in the next two years. Without fixing this unacceptable flaw, the AMT is simply not an option, either as a second, "supplemental tax" or as the only income tax.
I also suspect that advocating "making everyone pay the AMT" would not be politically smart, since many people still think of it as a "tax on the deadbeat rich." Still, the general framework of the AMT, if not the actual taxes it imposes, could be a useful as a prototype for a truly original "flattish tax."
This much is certain: the status quo is no longer acceptable.
All Related Posts (on one page) | Some Related Posts:
Posted by KipEsquire on
4 September 2005
To comment on this post, please visit the new blogsite.
