Taxpayer Choice Act a Less-than-Ideal Alternative to AMT

Published March 1, 2008

Congressman Paul Ryan (R-WI), a member of the House Budget Committee, has weighed in on the debate to end the Alternative Minimum Tax (AMT).

Ryan’s bill is called the Taxpayer Choice Act, H.R. 3818. It was introduced in the House on October 10, 2007.

The good news in Ryan’s bill, unlike the proposal of Rep. Charlie Rangel (D-NY), is that the AMT would actually be repealed if H.R. 3818 passes. The bad news is that the bill sets up another alternative tax, albeit much simpler than the current version.

Key Difference

Rangel last fall introduced the Tax Reduction and Reform Act, which would “pay for” an $800 billion repeal of the AMT by imposing a 4 percent tax surcharge on adjusted gross incomes over $200,000 for married couples and a 4.6 percent surcharge for those with incomes of more than $500,000. (See “Dueling Tax Packages Proposed in Congress,” Budget & Tax News, January 2008.)

The key difference between the Ryan and Rangel approaches is that the Ryan bill would give citizens the chance to choose to be taxed under either the alternative system or the current system, but not both. One major problem with the existing AMT is that it applies to all taxpayers, whether they like it or not, and most never find out until it’s too late.

Though there are some exceptions, the election provided for in H.R. 3818 is a one-time choice to be taxed under the new alternative system or to remain under the current system. Once the election is made, the taxpayer will be stuck with the consequences.

The new system, called the Simplified Individual Income Tax System, will not be available to corporations.

It purports to be a flat tax system, but it has more than one tax rate, which means it is not a flat tax.

The Details

Under the plan, married persons and surviving spouses with taxable income of less than $100,000 would pay a tax equal to 10 percent of their taxable income. If your taxable income is $75,000, your tax is $7,500. Those with taxable incomes of more than $100,000 would pay $10,000, plus 25 percent of taxable income over $100,000.

Unmarried persons would pay a tax of 10 percent on income less than $50,000. Those with income more than $50,000 would pay $5,000, plus 25 percent of taxable income over $50,000. For example, if a single person had taxable income of $70,000, his tax would be $10,000 ($5,000 plus 25 percent of $20,000).

For purposes of the alternative tax under this proposal, the taxpayer would be allowed a deduction for only three items:

  • A personal exemption of $3,500 each for an individual and his spouse;
  • A dependent allowance of $3,500 for each dependent; and
  • A standard deduction of $25,000 for joint returns and surviving spouses, and $12,500 for single persons and married filing separately.

The Problems

While it’s true this bill contains an election provision, it is nevertheless a second income tax system running alongside the existing system. It continues to be a huge Band-Aid designed to mask the profound problems with the existing system.

And though it’s a positive that citizens would have the right to choose to be treated under one system or the other, why not just acknowledge that our primary system is deplorable and fix it?

The second problem is that this system, like the one proposed by Rangel, is unwilling to give up the expected revenue represented by the current AMT. The number one impediment to repealing the AMT is that Congress simply will not give up the money.

The only way to have real tax relief is if there are honest-to-God spending cuts.

All you have to do is examine the growth in spending over the past 20 years to guess what the chances are of that happening.

Dan Pilla ([email protected]) is a nationally known expert on taxpayers’ rights and IRS abuse, founder of and the Tax Freedom Institute, and author of 11 books including The IRS Problem Solver, number one on The Wall Street Journal’s top five tax books list.