NCPA - National Center for Policy Analysis


December 2, 2004

Congress created the alternative minimum tax (AMT) in 1969. It was originally designed to prevent rich citizens from reducing their tax liabilities to zero by taking numerous exemptions. Writers at the Economist magazine believe it can now serve as a vehicle for tax reform.

To economists, a good tax system is one that raises money with minimal distortion to the economy. Marginal tax rates should be simple and broad, with few if any exemptions. The current system fails miserably, according to the Economist:

  • It is massively complicated -- the cost of complying with taxes is estimated to be well over $100 billion a year -- more than 10 percent of income-tax receipts.
  • Tax exemptions are numerous and serve as a way to reward political allies or engage in social engineering.
  • Additionally, refundable tax credits are a primary source of income support for the working poor.

In contrast, the AMT is far simpler, says the Economist. It allows fewer deductions than the normal income tax (mortgage interest, donations to charity and a few other things). Moreover, it is also less progressive, with two rates of 26 and 28 percent, levied on income above a certain tax-free amount, says the Economist.

Switching to the AMT would both simplify and lower the current tax code; two goals for the Bush administration. Moreover, since it already exists, it would be more easily implemented both politically and practically.

Source: "A promising alternative," Economist, November 25, 2004.

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