NCPA - National Center for Policy Analysis


May 3, 2007

We should not abolish the Alternative Minimum Tax (AMT), but instead, reform it in such a way that it encourages economic growth.  This can be done so that, over time, the AMT turns into a taxpayer-friendly, flat tax rate for the middle class, says David R. Henderson, a research fellow with the Hoover Institution.

The right reform is to tweak the AMT around the edges so that more and more people will face lower marginal tax rates:

  • The AMT has been rightly called a "stealth tax" because so few people are aware of it until it reaches out and bites them.
  • But it's also a modified flat tax rate and further reforms should make it flatter and lower.
  • That way, even moderate inflation could "stealthily" move us, over about 10 years or so, to a flat tax for most Americans.

But why is a flat tax rate desirable?

  • It has a positive effect on the incentives to earn, save and invest; the lower the marginal rate, the stronger those incentives.
  • The AMT could be changed to keep the federal government's revenues constant; the net effect would be more work and more output.
  • A flat tax rate gives lower-income people a disincentive to advocate more federal government programs, because they will see themselves as paying for those programs.
  • On a state level it gives people, especially those with higher incomes, a reason not to support creating more state and local government programs, because they no longer will be able to deduct their state tax bills from their federally taxable income.
  • Taking roughly the same percentage of everyone's income is fairer.

Source: David R. Henderson, "Don't Abolish the AMT," Wall Street Journal, May 2, 2007.

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