Very Interesting ... But Stupid

In Saturday’s Washington Post, Michael Kinsley argued that the U.S. should dump the regular income tax and replace it with the simpler and fairer alternative minimum tax. On their face, his arguments are appealing: The AMT has a broader base than the regular income tax. It has only two rates—26 percent and 28 percent. And it is simpler, dispensing with a raft of deductions, including those for state and local taxes, personal exemptions, and the standard deduction.

So why did I flash back to the old 1970s comedy Laugh-In, when Arte Johnson, replete with Wehrmacht battle helmet and a bad German accent, would pipe up, "Very interesting … but stupid"?

Kinsley is not the first smart guy to suggest that the AMT might be the basis for a reformed tax system. The editorial page of the Wall Street Journal made the same suggestion back in December of last year.

But as David Weiner of the CBO and I concluded, the AMT would be a terrible replacement for the current income tax. First, despite appearances, the AMT is far from a flat tax. Because the AMT exemption phases out with income, it includes phantom tax rates as high as 35 percent. Indeed, most AMT taxpayers face higher effective tax rates under the AMT than under the regular income tax.

A related point is that the AMT is not nearly as progressive as the regular income tax. The phase-out range for the AMT exemption goes from about $150,000 to $400,000 for a married filer. Above that income level, the AMT rate falls to the advertised top rate of 28 percent. That is, very high income taxpayers pay much lower rates under the AMT than the merely rich. Thus, replacing the regular income tax with a stand-alone AMT would represent a huge tax cut for the über-rich.

Another serious flaw in the AMT is that, unlike the regular income tax, brackets and exemptions are not indexed for inflation.This means that every year, people's average tax rates go up even if their income just keeps pace with inflation. This very unpopular phenomenon, sometimes called bracket creep, was vanquished from the regular income tax in 1981 and should not be a feature of any reformed tax system.

The AMT also has enormous marriage penalties—two-earner couples could face a huge tax hike when they get married. And the AMT disallows some deductions that clearly should be allowed, such as lawyers’ fees associated with taxable damage awards.

And, finally, even though the cost of eliminating the regular income tax is declining over time, it is far from zero. Doing away with the regular income tax while leaving the AMT in place would add over $1 trillion to the national debt over the next decade. With the federal government about to face unprecedented demands to meet promises made to retiring baby boomers, the last thing we need is one more regressive, poorly designed, fiscally reckless tax cut.

Mr. Kinsley, if you have any other good ideas about the AMT, you might want to check here first. The Tax Policy Center has actually done a fair amount of work on the subject.