NCPA - National Center for Policy Analysis

PROPOSED SURTAX WOULD BE WORSE THAN EXISTING ALTERNATIVE MINIMUM TAX

January 21, 2008

A Tax Policy Center proposal to repeal the Alternative Minimum Tax and replace it with a 4 percentage point surtax on adjusted gross incomes in excess of $100,000 for singles and $200,000 for couples would really only act like the AMT in disguise, says Michael Schuyler, a senior economist for the Institute for Research on the Economics of Taxation.

Consider:

  • 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, higher than the pre-Bush 36 percent bracket.
  • For taxpayers in the 35 percent bracket, the marginal rate would increase to 39 percent, almost as high as the pre-Bush 39.6 percent.

Further, the surtax would also apply to other forms of income.  For instance:

  • The rate on long-term capital gains, which was reduced from 20 percent to 15 percent in 2003, would go back up to 19 percent for taxpayers subject to the surtax.
  • Only the marginal rate on qualified dividends, which would rise from 15 percent to 19 percent, would remain appreciably below what it was prior to the Bush tax cuts, when dividends were taxed at the ordinary rate.

Many of these taxpayers have considerable discretion in how much they work, spend and save.  A surtax would reduce work effort, reduce saving and investment, and increase tax avoidance and evasion.  The economic damage would be especially serious because the millions of people the surtax would target are among the most productive and economically dynamic people in society.

Source: Michael Schuyler, "Proposed Surtax Would Be Worse than Existing Alternative Minimum Tax," Heartland Institute, February 1, 2008.

 

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