Marginal Revolution: Expand the AMT!

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Expand the AMT!

We shouldn't get rid of the AMT we should expand it. The AMT is a flat tax, it's broad-based (few loopholes), it doesn't allow for deduction of state and local taxes (which only increases the incentive of states and localities to raise taxes) and it's simple. The AMT should be reformed along the edges e.g. by indexing it to inflation (after more people are covered!) but overall it's a much better tax than the current income tax.

I assume that readers know that I am not in favor of raising taxes but let me be clear. We should expand the AMT but get rid of the income tax.

Posted by Alex Tabarrok on April 12, 2007 at 07:19 AM in Economics, Political Science | Permalink

Comments

Suppose local, state, and federal taxes are all about 40% of your income and you are not able to deduct anything. How are you going to pay 120% of your income in taxes?

The AMT is simply stupid.

Posted by: Michael H. at Apr 12, 2007 9:22:46 AM

The AMT has some serious flaws. For instance its taxing unrealized capital gains, even when those gains for one reason or another _cannot_ be realized, has led several people I know during the dot com boom to owe many times more money in taxes than they have ever seen in their lives.

Nonetheless with some simple reforms it seems like it could be a big improvement on the current system.

Michael H. -- In that case, move. It'll be crowded on the roads, though: all your neighbors will be moving out, too. It's called tax competition, and it's delightful.

Posted by: Grant Gould at Apr 12, 2007 9:54:23 AM

Isn't encouraging local taxes at the expense of federal taxes a good thing? It would seem that taxpayers would get a much better idea of how well their taxes are being spent and how much value they are getting at the state and local levels as compared to the federal level. Also the relationship between taxes and the economy could be more easily studied and understood.

Posted by: sourcreamus at Apr 12, 2007 11:59:53 AM

It would largely mean the end of the federal system in favor of a unitarian model, not really an advancement in my opinion.

Posted by: Lord at Apr 12, 2007 1:37:56 PM

Well, as I noted in an earlier comment on an
earlier posting, Tyler's view is the same as that
of The Economist. It is essentially a back
door way of achieving tax simplification. I
happen to support tax simplification, and maybe
it is the way to go, although I personally find
the AMT to be really annoyingly obnoxious,
although that may simply reflect the fact that
under the current system it leads me to be paying
more than I would otherwise personally.

Posted by: Barkley Rosser at Apr 12, 2007 1:52:00 PM

Michael, there is something wrong with your math. I think the AMT rate is 28%, not 120%. Anyway, I've always thought the rate should be closer to 20% and let everybody choose between the AMT and the regular "progressive" income tax.

By the way, if state and local taxes weren't deductible, then the voters in your state wouldn't have made it 40% of your income in the first place.

Posted by: Neil at Apr 12, 2007 1:52:17 PM

By the way, if state and local taxes weren't deductible, then the voters in your state wouldn't have made it 40% of your income in the first place.

That's a pretty bold statement. I could easily see voters making it 40% of my income... as long as it wasn't 40% of the majority voters' income. Just because I can't pay it doesn't mean they won't try to collect it. There's no law requiring voters to be rational.

Grant Gould is right about moving, though. You can blame California's high taxes on the weather and the beaches.

Posted by: eddie at Apr 12, 2007 3:41:43 PM

Getting rid of the "normal" income tax and keeping the AMT might be better than the status quo, but I think if we're going to invest in switching tax schemes it would be well worth it to drop income taxation altogether and switch to a flat retail sales tax (e.g. the Fair Tax). It's better than the AMT in numerous respects.

Since it will take the same number of flying pigs for either one to happen, we might as well not settle for second best.

Posted by: eddie at Apr 12, 2007 3:47:13 PM

The AMT is not a flat tax, it has 5 different rates (2 Ordinary, 3 capital gain), has an exemption amount, and has many more deductions than you might think (more are left in then left out in comparison to the ordinary tax). And anyone who seriously considers a flat tax does not think 25% is acceptable.

If you want dramatic improvemnt, this is a poor approach, and if you want incremental improvement, you have to lower the rate of AMT. Good luck with that.

Posted by: guy in the veal calf office at Apr 12, 2007 3:55:17 PM

At best, 24% is the AMT. My overall tax rate this year was 11%. Anything above 15% would freaking hurt me. do you really think that an actual increase in owed taxes by over 100% for many, if not most wage earners with salaried jobs, homes, and children is a good move?

Posted by: anonymous at Apr 13, 2007 12:17:10 AM

Expanding the AMT is a good idea if reforms consisted of four parts.

1) Repeal the income tax.
2) Remove “automatic qualifiers” such as stock options.
3) Substantially reduce AMT rates.
4) Allow a rollback to previous AMT exemption levels

Essentially, this would replace the current income tax system with a flat income tax, which would only include deductions for home mortgage interest and charitable donations.

John Goodman’s plan, on the other hand, which involves replacing the AMT and the income tax with a 14% flat consumption tax would achieve many of the same goals (and perhaps more by shifting taxes from income to consumption).

The issue then becomes not where should we go but how we should get there. It’s important to discuss the political viability of each of these plans in order to evaluate the likelihood that any of them would ultimately be written into tax policy. With this in mind, many things can go wrong in the process of trying to get Congress to adopt these policies. We must keep in mind the probability than any given provision will be compromised in the process and the net result of such a compromise.

For example, if the income tax were repealed and an AMT rollback were allowed to occur, but Congress failed to reduce AMT rates, a large amount of middle-income taxpayers would be hit with a big, unfair, and unexpected tax.

Posted by: Paul R. Dorasil at Apr 13, 2007 12:41:05 AM

Somebody ultimately will have to pay the taxes. AMT just happens to be the only real antidote to the gratuitous tax- cutting of Moron W. Bush and his Idiot Cabal. Currently, Federal tax collections are, relative to GDP, at their lowest level since 1950. Of course, Medicare and Medicaid did not exist in 1950,so,thanks to the Fascist Moron Regime, we are stuck with record structural budget deficits and the U.S. gov't. is largely financed by Chinese and Japanese central banks. But there are definite limits to their largesse, and they could well start dumping dollars at any time. Then, we'll need the AMT more than ever if we are to prevent hyperinflation. So, if you want hyperinflation and financial and economic collapse, go right ahead and repeal the AMT. Right now, it's the only significantly dependable source of Federal revenue, other than FICA taxes.

Posted by: Eugene at Apr 13, 2007 5:18:19 AM

Be careful with that axe Eugene.

Posted by: Xmas at Apr 13, 2007 8:41:31 AM

At best, 24% is the AMT.

No. At best, AMT is 0%. It's 0% for any individual earning less than $42,500 and any married couple earning less than $62,550.

The AMT replaces lots of deductions with one large standard deduction. You can't compare the marginal rate on the AMT (26% or 28%) to your overall tax rate. For any individual making less than $85,000, the total tax rate will be less than 14% for the AMT, and considerably lower for people making less than $85,000.

It approaches 28% in the limit as incomes go to infinity, sure.

http://www.irs.gov/businesses/small/article/0,,id=150703,00.html

Posted by: John Thacker at Apr 13, 2007 9:15:41 AM

Me, I like a progressive tax code. I find arguments that conflate a flat tax rate with tax simplicity to be unconvincing, if not dishonest. The core, and in some ways irreducible, complexity of an income tax is determining what income is; once you've done that, determining 15% or 25% or 40% of that is trivial.

(I do recognize that a chunk of complexity comes from the rules that try to block schemes to shift income from high bracket to low bracket taxpayers.)

Posted by: Grant at Apr 13, 2007 2:37:19 PM

I'm fairly impressed by the knowledge of AMT in the comments. My personal experience is that the AMT is almost incomprehensible. For example, if you are subject to AMT, you still get to deduct home mortgage interest but not property taxes. To me, it's completely arbitary since both are normal costs of home ownership. Moreover, I could be certain of this only by doing whatif adjustments to my return. It's not at all easy to see if you just read the AMT form.

Posted by: Roy at Apr 13, 2007 3:02:24 PM

"it's simple"

Clearly AT is not on the accounting faculty, let alone actually prepared taxes for a diversity of clients. Hell, he hasn't even made it clear if he would like corporations put under the same AMT regime as non-artificial people. Yep, AMT ain't just for your mom and pop.

Good luck dealing with that kind of political blowback...

Posted by: agm at Apr 14, 2007 6:47:55 AM

I'm against any flat tax.

A new study shows that the richest now pay less in taxes than anytime since the 60's.

While the richest are getting hugely richer, and the rest of us are barely staying even.

Over the last few decades when the government has been controlled by rightwingers, the income of average Americans has been stagnant, while the income of the top .1% has skyrocketed.

At the same time, average Americans are losing benefits while CEO's get hundreds of millions when they get fired for incompetence.

The tax system should be come far LESS flat.

The superrich have enormoously benefitted from legislation allowing outsourcing of our jobs to communists, glorious global capitalism, moving headquarters out of America to avoid ALL taxes, war profiteering, backdating their options.

At the same time they have gotten support from (our???) government to slash real pensions of workers, eliminate or hugely raise the costs of healthcare, insist on 60 hour workweeks without overtime pay, and despite huge increases in productivity thanks to workers, refuse to raise wages - and get help from the US Labor Department on how to avoid paying overtime rates.

Get rid of the AMT and raise the top rates to 50% for those in the top .1% of income.

And keep the estate tax while raising the minimum to $10 million and adjusting for inflation.

Posted by: Marcia at Apr 15, 2007 8:13:13 PM

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