Saturday, June 03, 2006

How I Learned to Stop Thinking and Love the AMT

I have previously said that the Alternative Minimum Tax sucks. For the record:

The alternative minimum tax (or AMT) is an extra tax some people have to pay on top of the regular income tax. The original idea behind this tax was to prevent people with very high incomes from using special tax benefits to pay little or no tax. But for various reasons the AMT reaches more people each year, including some people who don't have very high income and some people who don't have lots of special tax benefits.

And, as Slate noted:

[L]ast spring, Robert Carroll, deputy assistant secretary at Treasury, testified that the AMT was set to spread rapidly. It is designed to ensnare the prosperous middle—people whose income places them in the 25 percent tax bracket. (The AMT imposes a tax ranging from 26 percent to 28 percent on income.) Even with the patches, about 3.8 million taxpayers, including 13 percent of those with incomes between $100,000 and $200,000, would pay the AMT for tax year 2005, Carroll said.

Despite opinion to the contrary, I haven't quite changed my mind. But this caught my attention:

As Post business reporter Albert B. Crenshaw has noted, the AMT "approaches a modern-day flat tax." It imposes a uniform rate of 26 percent up to $175,000 in income, and above that 28 percent.
If we wait long enough, and with some continuing degree of inflation, the AMT flat tax eventually will apply to most taxpayers. The AMT will, in effect, have become the federal income tax system. And unlike most other important policy changes, this is one in which Congress need do nothing, although at some point it would probably be desirable to modify details of the current AMT that limit its effectiveness as a flat tax.

While I'm not opposed to a flat tax -- and certainly it's a better idea than our current screwed-up system where the middle class ostensibly pays the biggest share of the tax burden -- I'm not altogether convinced that a flat tax is the best idea. I guess I'm still liberal enough to believe that we need a more progressive tax system.

Plus, if the tax code were simpler, there'd be less need for tax lawyers. And that would really suck.


mad said...

Damn Republicans. Isn't the flat tax regressive, though?

Dara said...

A system with flat marginal tax rates is attempting to be proportional, not progressive. A system with a flat tax amount is clearly regressive. So, it really depends on what you're taling about. A consumption tax or VAT would probably wind up being regressive.

At the micro level, a true flat tax is inherently unfair, because there are staggeringly different economic consequences of, for example, a 25% tax rate on families with gross income of $50,000, $500,000, and $5,000,000.

On the other hand, as far as I can tell -- and the wonks out there could probably explain it better than I could -- due to the availability of deductions, lower capital gain tax rates, etc., the current U.S. system is progressive to a point, and then becomes regressive.

mad said...

I admit that's all way over my head. I only know this: Anything once advocated by Steve Forbes has to be not good.