NCPA - National Center for Policy Analysis

THINKING ABOUT TAXES

March 30, 2005

Most Americans either pay no federal income taxes at all or are in the 10 percent or 15 percent marginal tax brackets. However, growing numbers of taxpayers are finding that something called the Alternative Minimum Tax is raising their marginal tax rate, says Bruce Bartlett, a senior fellow with the National Center for Policy Analysis.

  • The AMT is a completely separate tax system with two brackets, 26 percent and 28 percent, which apply to a broader definition of taxable income than is calculated on the regular tax form.
  • In particular, taxpayers lose several deductions, such as that for state and local taxes; this tends to force people living in high-tax states, like New York and California, to pay higher taxes under the AMT.
  • Taxpayers must pay the AMT if it is higher than their regular income tax.

Various types of business investments are also taxed differently because of provisions in the tax code, says Bartlett:

  • Those that are debt-financed bear a lower tax burden than those that are equity-financed due to the deductibility of interest, even with the lower tax rates on dividends and capital gains that now exist.
  • For this same reason, when taxpayers invest in housing the return is taxed much more lightly than if they were to invest in stocks or a business.

We may not like thinking about the taxes we pay or our tax rates. But they are important economically and at least once a year we should take the time to become aware of them. It's important information that can help us make both financial and political decisions, says Bartlett.

Source: Bruce Bartlett, "Thinking About Taxes," National Center for Policy Analysis, March 30, 2005.

 

Browse more articles on Tax and Spending Issues