June 27, 2007
For more information, contact Bill Ahern at 202-464-5101
full study online at http://www.taxfoundation.org/publications/show/22449.html
related study at:
http://www.taxfoundation.org/publications/show/22447.html
Washington, D.C., June 26, 2007 - A new Tax Foundation study lays out a revenue-neutral plan to fix the Alternative Minimum Tax (AMT), restoring it to its original, limited role: preventing a few high-income people from combining so many deductions and exemptions that they owe little or nothing.
At the same time, the plan cuts tax rates for low- and middle-income groups, making the overall distribution of the tax burden more "progressive," i.e., shifting the tax burden up the income scale. The majority of tax returns in every income group less than $500,000 would get a tax cut.
The report is Tax Foundation Special Report, No. 157, by economist Gerald Prante. It calls for four tax-cutting provisions and four expansions of taxable income that offset each other, keeping revenue the same:
Tax Cuts:
• Raise the AMT exemptions to $300,000 for singles and $450,000 for couples and index them for inflation.
• Drop the 10 percent rate to 8.5 percent.
• Drop the 15 percent rate to 13.5 percent.
• Drop the 25 percent rate to 24 percent.
Expansions of Taxable Income:
• Repeal deduction for state and local income taxes.
• Repeal deduction for state and local sales taxes.
• Repeal deduction for real estate taxes.
• Repeal the exemption for municipal bond interest.
Some in Congress have called for a straightforward repeal of the AMT, but new House rules requiring a pay-as-you-go, revenue-neutral approach to tax changes make straight repeal unlikely.
"Other plans to fix the growing AMT raise tax rates dramatically," said Prante, "and some even dredge up a bad idea from Vietnam War days-surtaxes."
Economically speaking, the Tax Foundation plan is superior because so few tax returns would face higher marginal effective tax rates.
"Broadening the tax base-making more income taxable-is an essential part of good tax policy," said Prante. "Plans that make up for lost AMT revenue by raising rates instead of broadening the base will do more damage to the economy."
High-income, high-tax states are likely to object to the loss of the state-local tax deduction, but they will gain the most from the plan's higher AMT exemption levels. They also benefit most from the Bush tax cuts, as shown in another recent study by Prante, "Comparing Popular Tax Deductions to the Bush Tax Cuts," Tax Foundation Fiscal Fact, No. 87 at http://www.taxfoundation.org/publications/show/22447.html
Scott Hodge, president of the Tax Foundation, commented, "We view this AMT fix not as the fundamental tax reform the nation needs, but rather as a bridge to 2011 when the Bush tax cuts expire. By that time, we will hopefully have designed a more far-reaching tax reform that would build on the theme of this AMT fix: taxing previously untaxed income which permits more moderate tax rates overall."
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The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
For more information, contact Bill Ahern at 202-464-5101.