NCPA - National Center for Policy Analysis


May 1, 2007

House Ways and Means Chairman Charlie Rangel and other key Democrats have come up with their plan to protect the middle class from the growing reach of the Alternative Minimum Tax (AMT).  It is no surprise that Democrats want to go after high-income earners, whom they call "rich."  What is surprising is how high rates must be raised to make their plan's numbers add up, says Stephen Moore, an economics writer for the Wall Street Journal.

For example:

  • The top AMT rate would increase to 31.5 percent from 28 percent.
  • Democratic tax experts also recommend eliminating the lower rate for capital gains and dividends for those subject to the AMT; this would raise the capital gains tax rate to about 31 percent from its present 15 percent rate.
  • The Congressional Budget Office, using its own assumptions, calculates that the revenue-maximizing tax rate on capital gains is 28 percent (and many economists believe it is a lot lower than that).
  • This implies that the tax hike contemplated by the House Democrats would not only reduce economic growth and cost jobs, it would lose revenue for the government.

The changes in the AMT rate, and the treatment of dividends and capital gains, still leaves Rangel at least $600 billion short of paying for the AMT fix.  House Democrats have acknowledged that to close this final gap, they will have to look to personal income taxes:

  • Tax experts on Capitol Hill and in the Treasury Department calculate that to get $60 billion a year from the top 1 percent of income earners would likely require rate hikes of 10 to 15 percentage points.
  • This would lift the top federal marginal income tax rate as high as 50 percent.

Source: Stephen Moore, "$650 Billion Tax Hike," Wall Street Journal, April 30, 2007.

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