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Democrats Propose 'Surtax' On Wealthy Families

by Mike Godfrey, Tax-News.com, Washington

18 June 2007

House Democrats are proposing a "surtax" on America's wealthiest households as a solution to the growing problem of the alternative minimum tax.

According to a recent report in the Washington Post, one version of the Democrat plans would see a 4.3% surtax applied to household income of more than $500,000. This would raise sufficient revenues to allow AMT to be abolished for taxpayers earning less than $250,000 per year, while households with income of between $250,000 and $500,000 would see their tax bill reduced.

The surtax would affect about 1 million wealthy families, but the proposals would lower taxes for about 90 million other taxpayers, the Post reported, citing Democrat aides.

Richard Neal, chairman of the House Select Revenue Measures subcommittee with responsibility for AMT, has claimed that the plans have broad support within the House Ways and Means Committee, which has overall jurisdiction over taxation.

A similar plan proposed by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, would see a 4% surtax charged on individuals with adjusted gross incomes above $100,000 and couples with incomes above $200,000. The surtax would apply to income above those thresholds, and the thresholds would be indexed for inflation after 2007. Under this option the AMT would be completely repealed.

The AMT was originally conceived in the 1960s as a mechanism to ensure that 155 high income taxpayers were not able to completely eliminate their tax liability through deductions and exemptions. However, the legislation was never indexed to inflation, meaning that more and more taxpayers must calculate their income taxes under the system every year. In 2006, 4 million families were hit by the AMT, but in 2007, this figure has been estimated to jump to 23 million.

To curb the reach of AMT, lawmakers have enacted regular "patches" to ensure that middle income taxpayers stay out of the system's clutches. However, there is broad consensus among lawmakers that a permanent solution to the problem is long overdue.

Some, like Sen. Chuck Grassley, the senior Republican on the Senate Finance Committee, are calling for complete repeal of the AMT without any offsets.

In a speech on the Senate floor last week, Grassley criticised Democrats, who now have overall control on Congress, for dragging their heels on a legislative solution to the alternative minimum tax, and denounced the leaked proposals to the press as "smoke and mirrors".

"I’ve come to realize that the best way to learn about new proposals to deal with the AMT is not to check for new legislation in the Congressional Record, but to check a newspaper," he observed.

Grassley argues that there is no need to replace revenues foregone through the abolition of AMT, as the system is collecting revenues that were never intended to be collected under the original legislation.

"Aside from the fact that Congress doesn’t seem to be under any pressure to actually take action, all of the proposals share the same major flaw in that they seek to offset any revenues not collected through reform or repeal of the AMT. Notice I said 'not collected' and not 'lost,'" he stated.

"The AMT is a completely failed policy that is projected to bring in future revenues that it was never designed to collect," he added.

Grassley argued that the best solution to the mess was his “Individual Alternative Minimum Tax Repeal Act of 2007”, introduced with Senate Finance Committee Chairman Max Baucus, and Senators Crapo, Kyl and Schumer.

"While permanent repeal without offsetting is the best option, we absolutely must do something to protect taxpayers immediately, even if it involves a temporary solution such as an increase in the exemption amount. Of course, if we do that we are going to be in the same fix next year and I will be making the same points again," Grassley concluded.

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