My colleagues and I had some heartburn when various news outlets referred to a surtax proposal made by Greg Leiserson and me as "the Tax Policy Center plan" to fix the AMT. The TPC has no tax plan or institutional positions of any kind. Highlighting that point, TPC's chief blogger, Howard Gleckman, showed that we don't speak with one voice when he complained that "I don't like ... the way AMT relief [in Chairman Rangel's tax reform plan] is funded" in his most recent post. That is, Howard's not keen on Greg's and my modest proposal, which Mr. Rangel adopted with small modifications.
On some level, I agree with Howard. In a perfect tax system, you'd define the base and tax it. End of story. No surtaxes. But our tax system is not perfect. The AMT is the poster child for pointless complexity, but it's got lots of company. The phase-outs of itemized deductions and personal exemptions, which Chairman Rangel's plan would resurrect, are also complex and confusing. The AGI surtax, in contrast, is simple and transparent. For example, a couple earning $300,000 would add $4,000 (4 percent of $300,000 minus $200,000) to their income tax, a simple calculation and an amount probably far less than what they'd pay in AMT.
The surtax is also consistent with the original motivation for the AMT, which was to make sure that high-income people paid at least some tax. (The AMT was enacted after the Treasury reported that 155 high-income taxpayers had paid no income tax in 1967, provoking a firestorm of protest.) While it's true that wealthy coupon clippers could still elect to earn all or most of their income in the form of tax-exempt bonds and escape the surtax (since tax-exempt bond interest is not included in AGI), most other high-income folks report substantial AGI.
The main virtue of the surtax is political. By taxing a very broad measure of income, the top effective tax rate can be kept lower than it would be if income tax rates were adjusted directly (since tax rates apply to taxable income—AGI minus deductions—which is a significantly smaller base than AGI). The AGI surtax also applies to capital gains and dividends, which further helps to keep the surtax rate relatively low.
Of course, as Howard notes, a better option would be to broaden the income tax base rather than raise rates. For example, repealing the state and local tax deduction would raise more than enough revenue to finance AMT repeal. However, Mr. Rangel (D-high tax state) is unlikely to propose that anytime soon.
Yes, the surtax would not be great tax policy in a world where everything is on the table. But in a second-best world where political constraints have thwarted serious efforts at reform for decades, the surtax would be a huge improvement over the AMT.
Whether it really is politically feasible is another question.
