February 13, 2008

THE RANGEL AMT PROPOSAL VERSUS UNPAID-FOR REPEAL OF THE AMT: WHICH IS BETTER TAX REFORM?
  By Aviva Aron-Dine

Last fall, House Ways and Means Committee Chairman Charles Rangel introduced major tax legislation (H.R. 3970) that would repeal the Alternative Minimum Tax and finance repeal by imposing an income tax surcharge on high-income households.  The package also includes expansions of the Earned Income Tax Credit, refundable Child Tax Credit, and standard deduction and a reduction in the corporate income tax rate, financed by reforms to the corporate income tax.

This analysis focuses on the bill’s AMT proposal.  That proposal meets the key criteria for tax reform:  it eliminates a feature of the current tax code that suffers from a number of problems and replaces the lost revenue in a way that is simpler, more progressive, and probably more economically efficient. 

Republican congressional leaders have sharply attacked the Rangel plan as a massive tax increase that would seriously damage, or even “doom,” the U.S. economy.  This response should arouse concern from members of both political parties who envision someday enacting bipartisan tax reform legislation that, like the 1986 Tax Reform Act, is revenue neutral.  If any legislation that lowers some taxes and raises others to compensate is vilified as a “tax increase,” fiscally responsible tax reform will become all but impossible.

The Rangel AMT plan should be evaluated on basic tax-reform criteria.  That is, it should be compared with current law and alternative proposals on such measures as revenue adequacy, equity, efficiency, and simplicity.  This analysis finds that the Rangel bill scores high relative to both the existing AMT and the most frequently discussed alternative approach to AMT reform:  repealing the AMT without paying for it.[1]

Click here to read the full-text PDF of this analysis (15pp)

End Notes:

[1] The bill’s expansions of the Earned Income Tax Credit and refundable Child Tax Credit are also good policy.  For CBPP analysis of these proposals, see Aviva Aron-Dine and Arloc Sherman, “Ways and Means Committee Chairman Charles Rangel’s Proposed Expansion of the EITC for Childless Workers:  An Important Step to Make Work Pay,” October 25, 2007, https://www.cbpp.org/10-25-07tax.htm and Aviva Aron-Dine, “Improving the Refundable Child Tax Credit:  An Important Step Toward Reducing Child Poverty,” revised November 13, 2007, https://www.cbpp.org/10-24-07tax.htm.

KEY FINDINGS IN THIS REPORT:

Rep. Charles Rangel’s proposal to replace the Alternative Minimum Tax with an income tax surcharge meets the criteria for tax reform. It would be simpler and more progressive — and likely more economically efficient — than the current AMT.

The surcharge would affect only a small minority (about 3 percent) of households, all of them high income. It would be indexed to inflation, so it would never grow to affect the middle class.

The proposal would reduce taxes for low-, middle-, and upper-middle-income households. It would scale back the 2001 and 2003 tax cuts for high-income households but still leave them with sizable net tax cuts. (Households with incomes over $1 million would still get an average tax cut of $21,000 in 2008, for example.)

The proposal is also revenue-neutral, so it would add nothing to the deficit. In contrast, the proposal to repeal or sharply reduce the AMT without paying for it could add as much as $2 trillion to deficits over the coming decade (2008-2017). For this reason, the Rangel proposal would likely be better for the economy.