NCPA - National Center for Policy Analysis


October 29, 2007

Some Democrats in Congress are floating a proposal to repeal the Alternative Minimum Tax (AMT) and replace it with a 4-percentage-point surtax on adjusted gross incomes (AGI) in excess of $100,000 for singles and $200,000 for couples.  It sounds like a simple solution, but the surtax would act more like the AMT in disguise, says Michael Schuyler, a Senior Economist for the Institute for Research on the Economics of Taxation.

Under the proposed surtax:

  • Affected taxpayers now in the 25 percent income tax bracket would see their marginal tax rate increase to 29 percent, higher than the 28 percent rate prior to the Bush tax cuts. 
  • The marginal tax rate for taxpayers in the 28 percent income tax bracket would jump to 32 percent, higher than the pre-Bush 31 percent bracket.
  • Taxpayers currently in the 33 percent bracket would pay a marginal tax of 37 percent, which is higher than the pre-Bush 36 percent bracket.
  • For taxpayers in the 35 percent bracket, the marginal rate would increase to 39 percent, which is almost as high as the pre-Bush 39.6 percent.

Since the surtax would be based on AGI instead of taxable income, it would affect households surprisingly low on the income ladder, says Schuyler:

  • For a single filer with itemized deductions equal to 20 percent of AGI, the 4-percentage-point surtax would begin at a taxable income of $76,600, which is in the regular income tax's 25 percent bracket.
  • For a couple with two children who claim itemized deductions equal to 20 percent of AGI, it would begin at a taxable income of about $147,000, which is in the regular tax's 28 percent bracket.

Many of these people have considerable discretion in how much they work, spend and save, says Schuyler.  A surtax would reduce work effort, reduce saving and investment, and increase tax avoidance and evasion.

Source: Michael Schuyler, "The Surtax: Worse Than the Alternative Minimum Tax," Brief Analysis No. 599, National Center for Policy Analysis, October 29, 2007.

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