NCPA - National Center for Policy Analysis


July 16, 2007

Although a "flat tax," such as an income tax that imposes the same rate at all income levels, is desirable, the odds that such a flat rate will ever be implemented are small.  However, it is possible to get much of the way there by flattening the Alternative Minimum Tax (AMT), says David R. Henderson, a research fellow with the Hoover Institution. 

Most flat tax advocates want a zero percent tax rate on a minimum level of income and a tax rate of about 19 percent on all additional income, with few, if any, deductions allowed.  The current AMT differs from this flat tax system in three main ways:

  • The basic exemption is higher.
  • The marginal tax rates are substantially higher.
  • The expenses that are deductible are more numerous than under a flat-tax regime. 

All three aspects of the AMT could be modified easily, while raising the same amount of revenue for the federal government, says Henderson.

Under the AMT, instead of basic deductions, the first $45,000 of income is exempt for a married couple filing jointly.  The tax rate on this income is zero:

  • On income above $45,000 the marginal tax rate is 26 percent, up to $150,000.
  • Above $150,000 the marginal tax rate is 32.5 percent up to $206,000.
  • Above $206,000 the marginal rate is 35 percent up to $330,000.
  • Above $330,000 the marginal tax rate falls to 28 percent.

The reason the rates go above the IRS-published AMT tax rates of 26 percent and 28 percent is that the exemption on the first $45,000 is phased out at higher income levels. 

The rate falls to 28 percent after the exemption is completely phased out.  With four rates -- 26 percent, 32.5 percent, 35 percent and 28 percent -- the AMT is like a modified flat tax, says Henderson. 

Source: David R. Henderson, "How to Fix the Alternative Minimum Tax," National Center for Policy Analysis, Brief Analysis No. 588, July 16, 2007.

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