Submitted by Tax God, Sep 11, 2007 13:37

This idea has been cast about, but there are several major problems with using the AMT as a backdoor to reform:

1. It moves further away from full business expensing. For instance, a desk takes 7 years to depreciate under the normal tax, and 10 years under AMT. It should be 1
2. The rate is still very high. Having a 28% rate (and mathematical 35% rate in the phaseout window of the exclusion) would result in super-high income taxes paid
3. There is a marriage penalty in the exclusion, the rate structure, and the phaseout
4. International income is double-taxed worse than under current law
5. All of the problems with AGI (exclusions and adjustments that should be in the base) are not remedied with AMT
6. There is no allowance made for size of household
7. Some of the deductions that remain (acquisition mortgage debt, medical expenses over 10% of AGI, charitable contributions) shouldn't be in an ideal tax base, either

A better plan would be the following:

1. Make all expiring tax provisions permanent. People often talk about the Bush tax cuts here, but there are about $40 billion annually in non-Bush tax cuts that routinely expire and Congress renews for one more year. Enough is enough. Tax reform is hard enough without moving targets
2. Target a federal revenue level of 18.5% of GDP. This is the historical average since 1960
3. Replace depreciation with full business expensing. This would probably also require "plusing up" mid-depreciating assets, and requiring carry-forwards of NOLs from structure expensing
4. Lower the top corporate rate from 35% to 25%, the level of our European competitors
5. Repeal the interest deduction for businesses. This pays for the lower corporate rate.
6. Exclude corporate-source capital gains, qualified dividends, and corporate-source interest from taxation. This would effectively make all savings Roth-style savings.
7. For any pre-tax savings, require them to be added back into income. This pays for full business expensing. Going forward, no pre-tax accounts of any kind (including DB pensions) would be permitted.
8. Add fringe benefits back into the base by denying a corporate deduction for them
9. Include the build-up in life insurance contracts and annuities in income
10. Shift to a territorial tax system (rather than worldwide taxation) to conform the U.S. with the rest of the world. Repeal tax subsidies for overseas investment to pay for this
11. Add 100% of Social Security and other government cash transfers into the base
12. Repeal all adjustments to income and deductions from income. Exceptions made for sliding-scale mortgage debt entered into by the prior year ($1 million the first year of reform, subtract of $100,000 every year thereafter until zero). Of this, only $100,000 can be equity debt (sliding scale).
13. Repeal the standard deduction, personal exemptions, and all credits to income.
14. Personal income tax for married couples is 15% on first $30,000/25% on $30,000-$100,000/33% on $100,000-$137,500/25% on levels above that. Half that level for everyone else.
15. Credit of $4000 per adult and $2000 per dependent. This phases out in the same bubble range as above. The EITC and ACTC is replaced by this credit if it results in negative tax liability.
16. This should raise enough money to repeal the rest of the estate and gift tax, the payroll tax, and excise taxes.

The above plan should make everyone happy. Conservatives get everything they want--lower tax rates, full expensing, territoriality, no death tax, no AMT, and no double taxation of savings. Liberals get a totally-integrated tax system that is at least as progressive as our current one.

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