University of Maryland economist Robert H. Nelson argues that the controversial Alternative Minimum Tax is a good thing because it is, in a sense, a stealth version of the flat tax.
The AMT is viewed by many as a bad thing. Yet, consider this: There is wide agreement among economists on the benefits of a federal “flat tax” on income that would apply a uniform rate to every taxpayer and eliminate most current deductions and tax credits. A flat tax would get rid of a large number of economic distortions resulting from the many tax “subsidies” that often benefit narrow interest groups. This is tax “pork,” and Congress is as addicted to it as to the ordinary spending kind.
While I personally find a “flat tax” intriguing as a baseline, to say there is “wide agreement among economists on the benefits” is misleading. They surely agree on the benefits but by no means is there widespread support for the idea. Indeed, I’d wager most support progressivity on principle. [Update: Kevin Drum agrees and puts it more strongly: “As Nelson surely knows, there’s wide agreement among economists that a broadly-based tax that minimizes exemptions and loopholes would be economically efficient. However, there is no agreement at all that having a flat rate is a good thing. It’s wildly dishonest to say otherwise.” Elsewhere, economist Mark Thoma is decidedly not part of the wide agreement, either.]
In places around the world, including Eastern Europe, governments creating new tax systems have been turning to a flat tax to avoid this sort of thing. What does this have to do with the AMT? Just this: As Post business reporter Albert B. Crenshaw has noted, the AMT “approaches a modern-day flat tax.” It imposes a uniform rate of 26 percent up to $175,000 in income, and above that 28 percent.
Tax revolutions are few and far between. Taxes are so important to the economy that major changes in tax law are best achieved incrementally, giving notice well in advance and avoiding potentially large disruptions from big surprises. That’s part of the genius of the AMT. If it is left alone, it will move us gradually but steadily toward a flat tax on income as inflation brings more people within its ambit.
Some leading Republican conservatives have long advocated a flat tax. Yet few of them are speaking out vigorously for retention of the AMT. In fact, many are joining the clamor in Congress for its repeal or limitation. It would seem that they were either hypocritical in advocating a flat tax or have somehow failed to recognize that the AMT is in essence a new, evolving form of flat tax.
Well, no. First, no Republican that I know of advocates a flat tax in the 26-28 percent range; most talk about one between 10 to 15 percent. For the federal government to take over a quarter of one’s income off the top, with no deductions, is confiscatory. Second, one can simultaneoulsy think a policy a good idea and oppose doing it covertly. The AMT’s critics find it outrageous that we set up a system encouraging people to make certain economic decisions–buying a house, making charitable donations, investing in education, an so forth–and then have a backdoor trap wherein those benefits are stripped after the money has been spent.
If the present AMT rates were applied as a universal flat tax — and especially if the AMT exemption were reduced and certain remaining AMT exclusions eliminated — the resulting federal revenue might even come to exceed current expenditure levels. The solution would then be to reduce the flat tax rate (the AMT rate) so that revenue and expenditures were brought back into balance.
So, the lure isn’t so much a flat tax but a massive tax hike. And the worst kind, at that: One enated by the vagaries of inflation rather than by the direct action of the elected representatives of the people. Further, we can rest assured that, if federal revenue rises, federal spending will do so as well.
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