In an effort to head off a massive tax hike that will impact more and more middle-income taxpayers in the next few years and give taxpayers the option of a simpler, fairer alternative to today’s overly complex tax system, this week I introduced the Taxpayer Choice Act, which repeals the alternative minimum tax (AMT) and establishes a highly simplified alternative to the current individual income tax.
When the AMT was created in 1969, as a mandatory add-on to the existing tax code, it was aimed at preventing 155 wealthy taxpayers from exploiting loopholes in the tax code to escape their legitimate tax obligations. However, partly because it was never indexed for inflation, the AMT next year will subject close to 30 million more taxpayers to an automatic tax increase – ensnaring many middle-income Americans who dutifully pay their taxes with a stealth tax increase that was never intended. The bill I introduced together with several colleagues in the U.S. House of Representatives would repeal this illegitimate tax and offer people the choice of an alternative tax system that is transparent, simple and efficient.
The bottom line is that the AMT was never meant to become the burden on law-abiding taxpayers that it is today – especially for a rapidly growing number of middle-income families. And Congress should do more than apply just a temporary fix, as we have in recent years. We need to do away with this unfair tax before it automatically raises the tax bills of even more working Americans.
We must change the debate in Washington to put the taxpayer first – not the government. At the same time, we can take a big step toward making the tax code more efficient and less complicated by giving taxpayers the option to choose a simplified income tax if they wish. This will start us on the path toward a more user-friendly tax system that’s easier to comply with and doesn’t contain stealth tax hikes.
If left unaddressed, over the next 10 years the AMT will impose $841 billion in higher taxes, largely on middle-income families. Under current tax law, for instance, in tax year 2007, about 70 percent of married taxpayers (with children) earning $75,000 to $100,000 will be subject to AMT. Various proposals for addressing this looming problem have been floated, and the House Ways and Means Committee chairman has announced that his committee will soon consider an AMT reform bill. It is expected that the chairman’s plan will replace the AMT tax hike with other tax increases that could have a negative impact on our economy. The Taxpayer Choice Act offers a different approach to solving the AMT dilemma, without replacing the AMT with further tax hikes.
Among its highlights, the Taxpayer Choice Act would:
- Eliminate the $841 billion tax increase that would result from the automatic expansion of the AMT, or from other tax increases imposed to “offset” the AMT.
- The Taxpayer Choice Act would prohibit the AMT from being imposed on individual taxpayers in any taxable year after 2006.
- Provide comprehensive reform – establishing a highly simplified alternative to the current individual income tax, one designed to keep federal tax revenue near its historical level (around 18.5%) as a share of the overall economy (GDP).
Offer taxpayer choice. Under this proposal, taxpayers can choose either to pay their taxes under the Simplified Tax or to continue paying taxes under the existing code. The advantages of the new tax system lie mainly in its simplicity and transparency: it has just two income tax rates (10 percent and 25 percent), a generous standard exemption amount, and no special tax preferences.
- The Simplified Tax system has two income tax rates: 10 percent on taxable income up to $100,000 for joint filers, and $50,000 for single filers; and 25 percent on taxable income above these amounts.
- Under the Simplified Tax, taxable income equals gross income minus a standard deduction and personal exemption. The standard deduction is $25,000 for joint tax filers, $12,500 for single filers. The personal exemption is $3,500. The combination is equivalent to a $39,000 exemption for a family of four. There are no additional credits or itemized deductions.
- Retain the current allocation of tax burdens. Analysis shows that if all taxpayers chose to pay taxes under the Simplified Tax, the distribution of tax burdens among income groups would remain close to what it is today.
- Deter "gaming" the system. This proposal doesn’t permit year-by-year tax code switches (“gaming”) aimed at avoiding legitimate tax liabilities. In general, individuals can choose to pay taxes under the new system at some point within 10 years of the date of enactment. After that initial choice, individuals are allowed one additional changeover between the two tax systems over the course of a lifetime. Individuals are also allowed to change tax systems if a major life event (death, marriage, divorce) alters their filing status. Otherwise the choice is essentially permanent.
- Maintain economic growth-oriented tax relief. The legislation makes permanent the capital gains and dividend tax relief of 2003.
U.S. Rep. Paul Ryan (R-Wis.) represents Wisconsin’s 1st Congressional District.