One step Congress can take to avoid bringing Greece's fiscal problems home

An good option for increasing revenue is a simplified Alternative Minimum Tax.

Petros Giannakouris/AP
Demonstrators gather at the Greek Parliament in front of riot police in Athens on May 20. In order to avoid a Greek-like crisis the US must reduce spending and increase revenues. One way congress can do this is with the a simplified Alternative Minimum Tax.

To avoid Greece-like fiscal woes, Congress needs to raise more revenue and cut spending. A value-added tax or a tax on carbon make economic sense, but implementing either could take years. Broadening the income tax base seems politically unrealistic, and Congress already upped tax rates to pay for the health care bill. One option for more revenue is a simplified Alternative Minimum Tax (AMT).

The current AMT isn’t a minimum tax at all; it’s simply a parallel tax. Relative to the regular income tax, the AMT is a mostly flat rate applied to a different tax base with a large standard deduction. The result is that about 4 million upper-middle income taxpayers, often with children and living in high-tax states, pay more under this parallel tax system.

Congress could improve the current system by creating a true "minimum tax": Adjusted-gross income (AGI) above a certain threshold—perhaps the $200,000 for single filers and $250,000 for married filers that President Obama favors—would be subject to a minimum tax rate. High-income taxpayers would lose the benefits of various deductions and credits if their average tax bill on AGI above the threshold fell below the minimum rate.

This plan would raise a substantial amount of revenue relative to current tax policy. Setting the minimum tax rate at 15 percent on AGI above the President’s high-income threshold (annually adjusted for inflation) would raise $165 billion over 10 years—roughly the amount the estate tax raises under current law. A 20 percent minimum tax rate would nearly triple the revenue gain to $480 billion, while a 25 percent rate would bring in five times as much—$832 billion. That’s real money. Congress could raise even more by expanding the AMT base to include certain types of exempt income, such as all interest on municipal bonds.

A simplified AMT would also ensure that all wealthy households pay a reasonable tax bill. Although the wealthy pay a lot in income taxes as a group, many pay relatively little. TPC recently estimated that among the richest 20 percent of tax units, about half paid less than 11 percent in income taxes. At least one-quarter paid less than 4 percent. A simplified minimum tax would hit those who pay little income tax, but protect those with an already-high tax burden.

As with all new taxes, there are drawbacks. Having two tax systems—even if one is extraordinarily simple—is a complex and burdensome way to tax income. Limiting itemized deductions for AMT taxpayers could have some unintended consequences, such as depressing housing prices in expensive markets or curtailing charitable giving. And if the minimum tax rate is set higher than the preferential rate on capital gains and dividends—currently 15 percent—some investors would see their after-tax returns diminish.

On the plus side, a simplified minimum tax would lower marginal tax rates for scores of households, simplify the extraordinarily complex current AMT, and reinstate the primary reason for a minimum tax in the first place: to ensure that the wealthy pay a reasonable amount of tax. The total number of AMT taxpayers would plummet from over 4 million to less than 500,000. The simple minimum tax would be an economists' dream: a broad tax base with a low rate. Best of all, a simplified minimum tax would help us pay our bills. It’s worth considering.

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