Alternative Maximum Tax

Posted by Marc Hodak on May 2, 2007 under Collectivist instinct | Comments are off for this article

That’s really what we have today, and the Democrats finally want to do something about it because it hits their blue state, urban constituencies hardest. Of course, their prescription is exactly the right one for discouraging economic growth–increase the income threshold for the AMT, increase tax rates on the highest earners, and raise the tax rate on dividends and capital gains.

David Henderson’s WSJ editorial alternatively puts forth one of my favorite ideas in recent years: don’t get rid of the AMT–transform the AMT into a flat tax, and let the rest of the tax code gradually disappear with inflation. Henderson proposes a couple of tweaks to the AMT to make it really flat: eliminate the few deductions it still offers, and reduce the rate from 26/28 percent back to something more reasonable, if not optimal.

This proposal solves several problems at once. In the near-term, the reduced rates dramatically reduce the number of people getting “trapped” into the AMT. But as incomes continue to rise, the people getting “trapped” are paying a more reasonable rate, say 20 percent on income above the global exemption of $45,000. Over time, that exemption will get inflated away–a good thing in Henderson’s view, as it brings more of the middle class into the tax pool.

Of course, if you’re a liberal Democrat, you’ll hate this idea for the three reasons upon which your politics are based: (1) It’s not punitively progressive on the most productive people in our society, and becomes less so over time, (2) it eventually eliminates “cherished” deductions like home mortgage interest and deductions for state and local taxes and other items favored by the politically well-connected, and (3) it eliminates one’s ability to use the tax code for social engineering.

Unfortunately, Henderson limits his arguments for a flat tax to supply-side theory, making the fairness argument literally as an afterthought. So let me bring fairness front and center:

– It’s unfair for a majority of the people to vote away the wealth of a minority for the simple reason that the minority has more of it, legally earned.
– It’s unfair to create beneficiaries of tax breaks at the expense of those who don’t get them. Why should renters be penalized at the expense of owners in the tax code? Who are these people who usurp this right to decide who is worthy and who isn’t?
– It’s unfair to subject every citizen to rules so dense and incomprehensible that they must hire professionals to comply with the law or, at best, sacrifice several spring days each year to understand what, exactly, is required of them.

OK. Now I feel better.