An Accidental Tax Boon
Sometimes in Washington, good things are more likely to happen by accident than by congressional or executive design. Treasury secretary nominee Henry M. Paulson Jr. is no doubt aware of this fact, but it's one worth keeping in mind in the continuing debate over tax reform, which is sure to command a good deal of the new secretary's attention. I'm thinking of one program in particular: the alternative minimum tax, or AMT.</br></br>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.</br></br>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.</br></br>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.</br></br>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.