1 |
Previous | 1 of 3 | Next |
|
This page
All
Subset
|
THE (ALTERNATIVE) MINIMUM TAX: PRECURSOR TO A FLAT-RATE INCOME TAX? by William D. Samson University of Alabama The alternative minimum tax is a complete tax calculation that haunts a relative small, but growing, percentage of individual taxpayers. It has evolved since 1969 from a conceptual nuisance which bothered almost no one to a tax which can be a nightmare for the unsuspecting. The alternative minimum tax with its almost uniform rate structure, applied to a broader base of taxable income, computed alter a large exemption, seems to be a mirror of the "flat" rate income tax proposals that have recently been described in the press. The 25 year history and evolution of the minimum tax seems relevant in the debate regarding proposals of change in the current graduated income tax to a broader-based, flat rate structure. The Evolution of the Minimum Tax In the mid-1960s, a study reported that 154 taxpayers with incomes in excess of $200,000 (more than $600,000 in 1996 dollars) escaped from paying U.S. income tax. This study became widely publicized, and Congress became concerned about erosion of the average taxpayer's confidence in the fairness of the income tax, especially when 154 wealthy taxpayers were paying no income tax through maximizing excluded income and tax deductions. Mrs. Dodge, heir to the Chrysler fortune who lived in Palm Beach on more than $1,000,000 of municipal bond interest and paid no income tax, was cited in Congress as an example of the unfairness of the income tax structure. Congress could have solved the problem of wealthy taxpayers owing no federal income tax by "plugging the loopholes" via taxing municipal bond interest, fully taxing capital gain, and repealing or limiting various itemized deductions. However, this approach was believed to have large negative economic and social consequences. Instead, Congress adopted Joseph Pechman's idea of imposing a tax on the use of loopholes. This tax (ironically known as the "minimum" tax, while the tax rate on earned income was capped at 50% was called the "maximum tax") would be in addition to the regular income tax. Simply put, the taxpayers would add up the amount of loopholes (called "tax preferences"), subtract a generous exemption amount and multiply the amount of preference in excess of the exemption by the 10% "minimum" tax rate. Implementation of the Add-On Minimum Tax Ironies abound. First, the Mrs. Dodges of the world still were not subject to tax because Congress decided not to include municipal bond interest as a preference item. Second, the 1969 version of the tax was very ineffective at imposing tax on the wealthy because of the large exemption. Third, as an equity mechanism, the tax failed because a 10% tax rate was too low when wealthy taxpayers otherwise saved tax via preferences at rates up to 70 percent. Perhaps the greatest irony in this addon minimum tax scheme was that in 1970, President Richard Nixon became one of the first "victims" of this tax. President Nixon, as it was revealed at the same time as the Watergate controversy, paid only $792 in federal income tax in 1970 and $878 in federal income tax in 1971. 1972's federal income tax soared by comparison to $4,298. Thus, less than $6,000 of income was paid during this three year period when Nixon's The Accounting Historians Notebook, Fall 1996 7