THE ALTERNATIVE MINIMUM TAX THREATENS MIDDLE-INCOME FAMILIES
September 11, 2006
The Alternative Minimum Tax (AMT) is complex and ineffective in ensuring that the wealthy pay taxes on their incomes. But even if it were repealed this year (while leaving the rest of the income tax system in place), by 2010, over 9,000 high-income filers would pay zero income tax, due to exemptions. Consequently, Congress should create a system that taxes everyone fairly and efficiently, and simplifies the entire federal tax code, says Paul Dorasil, a public policy intern with the National Center for Policy Analysis.
One solution is to replace the bloated, complex income tax system with a flat tax. For example, Congress could adopt a plan developed by NCPA President John C. Goodman with the help of economist Laurence Kotlikoff. Goodman proposes a 14 percent flat-rate tax that taxes the money people take out of the economy, not what they put into it.
The Goodman plan can be structured in a way that:
- Ensures the rich continue to bear more of the burden than they currently do; thus, the plan can be more progressive than the current system.
- Taxes income only once (when it is earned), and does not tax savings or investments; thus, the plan promotes efficiency and economic growth.
- Does more to help low-income families by providing incentives to purchase health insurance and invest for retirement.
The AMT has not achieved its intended goals, says Dorasil. It is inefficient because it discourages investment. At the same time, the AMT is ineffective in taxing the super-rich. Left unabated, it will cause a major tax increase for middle income filers starting in 2007. Congress could use this problem as an opportunity for real tax reform and adopt the Goodman plan for restructuring the federal tax code.
Source: Paul Dorasil, "The Alternative Minimum Tax Threatens Middle-Income Families," National Center for Policy Analysis, Brief Analysis No. 571, September 11, 2006.
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