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Expand the AMT April 14, 2007

Posted by federalist in Taxation.
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Alex Tabarrok over at Marginal Revolution offers the following clever summary:

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.

Indeed, the AMT is a much more attractive tax system than our baseline income tax code — in terms of offering easier compliance and fewer distorting incentives.  If more people knew that they would have to pay the AMT, they could ignore the regular tax system — and presumably the AMT’s currently high marginal rates could be lowered and still result in the same total revenue.

Though in practice I fear these benefits would be ephemeral:  After all, ever since the adoption of the 16th Amendment our political tendencies have been to abuse the prevailing tax code to impose increasing numbers of incentives (deductions, credits, loopholes) and policies (progressive rates, marriage penalties, implied welfare payments to low earners).

The real solution evidently requires some strict Constitutional qualifications on how taxes can be structured and how the revenue can be used.  But until we can muster another amendment I would gladly accept an expansion of the AMT as a temporary purge of the currently impossibly bloated tax code.

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1. federalist - May 6, 2007

David Henderson expounds the differences between the AMT and an ideal flat tax — and how we can get from the former to the latter.

The current AMT differs from this “flat tax” system in three main ways. The basic exemption is higher, the marginal tax rates are higher and the AMT allows deductions for expenses that would not be allowed in a flat-tax regime.

If a flat-tax rate regime is desirable, then the sensible reform would be to modify the AMT to get it closer to a flat tax. The three ways to do so, as the above comparison suggests, would be to reduce the exempt level below $45,000, reduce the AMT’s marginal tax rates and further limit the items that are deductible.


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