Search


Subscribe to AFM


Subscribe to AllFinancialMatters
by Email

All Financial Matters

Promote Your Page Too

The American's Creed

Site Sponsors

Books I Recommend


AFM in the Media


Money Magazine May 2008

Real Simple March 2008

Blogroll (Daily Reads)

« | Main | »

How About a 4.3% Surtax on the “Rich” to Fix the AMT?

By JLP | June 8, 2007

Homework assignment: Read Democrats Seek Formula to Blunt AMT

From to the article:

House Democrats looking to spare millions of middle-class families from the expensive bite of the alternative minimum tax are considering adding a surcharge of 4 percent or more to the tax bills of the nation’s wealthiest households.

Under one version of the proposal, about 1 million families would be hit with a 4.3 percent surtax on income over $500,000, which would raise enough money to permit Congress to abolish the alternative minimum tax for millions of households earning less than $250,000 a year, according to Democratic aides and others familiar with the plan.

I wasn’t exactly sure what a “surtax” was so I looked it up. According to dictionary.com, a surtax is:

1. an additional or extra tax on something already taxed.

2. one of a graded series of additional taxes levied on incomes exceeding a certain amount.
–verb (used with object)

3. to put an additional or extra tax on; charge with a surtax.

One thing isn’t clear to me: Is the $500,000 figure “income” or “taxable income?” Based on the 2007 Federal Income Tax Brackets, someone who had taxable income of $500,000 or more would be in 35% tax bracket. Add a 4.3% surtax to that and it brings their total tax to 39.3%.

So, what do you guys think? Is this fair? I’m not sure what I think about this. I’m not a fan of progressive taxation but I don’t have a better answer other than a flat tax.

Topics: Flat Tax, Taxes | 22 Comments »


22 Responses to “How About a 4.3% Surtax on the “Rich” to Fix the AMT?”

  1. exasperated Says:
    June 8th, 2007 at 1:15 pm

    I vehemently disagree with the underlying assumption: that the government has to somehow replace AMT revenue at all.

    The AMT is not inflation indexed and is anyway a sneaky backdoor tax. It is broken, and the proper thing to do is drop it altogether or rescale it so it only applies to clearly pathological tax-evasion scenarios.

    “We’ve been stealing from you for years, and we agree it’s bad, but oh well, we have to figure out how to pay our bills now without your money. Please be patient while we continue to pick your pocket.”

  2. JOhn BoB Says:
    June 8th, 2007 at 1:30 pm

    This can’t be right! Everyone knows that if you are rich you don’t pay any taxes at all!!

  3. Miguel Says:
    June 8th, 2007 at 2:35 pm

    I’m an AMT payer, not sure if it would be a positive or a negative for me, but I could live with it as long as the entire concept of AMT was abolished at all income levels and the normal deductions would apply. At least the $500K income cut-off is a lot closer to my concept of “wealthy” tax-payers than most proposals. I’m sorry, but $150K (where most Dem politicians like to define wealthy) just ain’t so.

  4. broknowrchlatr Says:
    June 8th, 2007 at 3:05 pm

    This looks good to me:

    5% tax for $500k+
    10% tax for $1MM+
    15% tax for $2MM+

    Abolish AMT and fix social sec

  5. JLP Says:
    June 8th, 2007 at 3:54 pm

    broknowrchlatr,

    Are you talking ON TOP of what they already pay? If so, I can’t agree with that.

  6. HMG Says:
    June 8th, 2007 at 4:47 pm

    broknowrchlatr – I agree with JLP. If you put a 15% surcharge on $2mm plus income, then really wealthy people will probably just relocate to another jurisdiction and then the U.S. would get no taxes.

  7. Gaming The Credit System Says:
    June 8th, 2007 at 8:10 pm

    Yeah, it looks like the proposal would just be instituting the 39.3% tax bracket for $500k+. I have to say that I don’t really have a problem with it if it does away with the AMT. Like it or not, progressive taxes are probably here with us to stay, and those over $500k in taxable income can afford good tax avoidance techniques, so they are probably really pulling in closer to $1mil anyway.

  8. Bobby Says:
    June 8th, 2007 at 10:22 pm

    ATTENTION: If you feel that the government would get rid of AMT or any other tax system, even for part of the households AFTER they are allowed to institute a surcharge tax of 4.3%…please contact me ASAP. I have outstanding financial opportunities for YOU!

    You should be the first one on your block to own your own bridge.

    You will notice, the referenced portion of the story says the surcharge would allow “Congress to abolish the alternative minimum tax for millions of households earning less than $250,000 a year.”

    So, AMT would not be eliminated for everyone.

    Fool me once, shame on you…fool me twice, shame on me. I would almost say, amend the tax code to eliminate AMT and then enact the surcharge if you are so sure it will work.

    But then I come to my senses and realize the problem isn’t a need to collect more taxes, but rather a need to reign in spending habits. I would love it if I could write checks daily without any concern to how it was going to be paid. However, the only people who can do that are theives, including those in Congress.

    Getting off my soapbox now.

  9. Bobby Says:
    June 8th, 2007 at 10:24 pm

    Oh, and BTW, I seriously doubt they would eliminate AMT for anyone.

  10. Andy Says:
    June 9th, 2007 at 3:53 am

    Right, because the government has never cut taxes before.

    BTW, what’s wrong with progressive taxation? A flat tax would be inherently unfair to the poor so you’d have to add complicated such as credits, regardless.

  11. Phil Says:
    June 9th, 2007 at 4:52 am

    JLP: The article says that the details of the plan are not out yet, just the concept which is to add another tax bracket above the current 35% max. I see nothing wrong with this since with GOP control we’ve swung too far with tax shifting (not tax cutting in the overall scheme) from the rich to the poor. Things that were cut as “fat” from the fed budget have been picked up sometimes at the state level; however, at least in PA where I live the state has shifted program funding to the local level which usually means a regressive tax (sales, property, use taxes).

    Personally, I like this explanation of progressive vs regressive tax (it’s from someone’s personal web page, so I don’t know how long this link will be good)
    http://www.psnw.com/~bashford/taxation.html

    Remind me why you don’t like progressive taxes at the fed level?

    A less snarky analysis from 1996 (prior to passage of the Dole tax cut, I think) is here:
    http://www.ppionline.org/ppi_ci.cfm?knlgAreaID=125&subsecID=163&contentID=1398

    BTW: You should be a big promoter of the AMT! With only two brackets at 26 and 28% eventually it will by default become the flat tax you crave. : )

  12. JLP Says:
    June 9th, 2007 at 10:27 am

    Phil said:

    “BTW: You should be a big promoter of the AMT! With only two brackets at 26 and 28% eventually it will by default become the flat tax you crave. : )”

    I was thinking more along the lines of a 10% flat tax on ALL INCOME with no deductions or tax breaks of any sort.

  13. JLP Says:
    June 9th, 2007 at 10:31 am

    Andy,

    I don’t see how a flat tax is unfair to the poor. A flat tax would be a percentage of income. If it is the same percentage for everyone, how is it unfair?

  14. Foobarista Says:
    June 9th, 2007 at 11:43 am

    As a practical matter, these stiff taxes on “the rich” won’t get paid, since people at truly high income levels often can restructure their income so it either is something other than “income”, or is paid overseas. This is why “soak the rich” taxes end up soaking only the “somewhat rich” who make enough so that some of their income is subject to the tax but not rich enough to afford the high-priced legal help to set up these things.

    Frankly, this is why, IMO, lots of “super rich” often don’t bother opposing tax increases and may actively support them. They won’t pay them, and supporting them makes them look like altruistic champions of The People. And they tend to be contemptuous of “strivers” who need lower tax rates to improve their economic status.

  15. Miguel Says:
    June 10th, 2007 at 10:46 pm

    I think JLP and Foobarista make good points:

    1) I see absolutely nothing unfair about a flat tax. In fact, why should income be taxed at all. Perhaps taxes should be more like subscription service – you check off the menu of optional services you’d like to subscribe to. Of course, some things, like military protection would be mandetory.

    2) Ultimately, the people who get hurt by soak the rich policies are the nearly rich – not the real rich. As Foobarista says, the real rich have many ways of structuring their earnings to avoid/reduce taxes. Those loopholes will never be eliminated because the politicians know who butters their bread.

  16. plonkee Says:
    June 11th, 2007 at 6:38 am

    One of the reasons that a flat tax is unhelpful to the poor is that there is a minimum amount of money that is required to live on. If you were even moderately wealthy, then a 10% tax rate wouldn’t effect that, but if you were poor then it would. Would a tax-exempt portion plus an 11% option be so bad?

    Military protection should be no more mandatory than anything else – if people think its important then they’ll have to choose to pay for it. If they don’t think its important then they won’t and after all, don’t you have government for the people?

  17. Dus10 Says:
    June 11th, 2007 at 7:48 am

    I am absolutely opposed to this. There comes a point where principle has to be the overriding factor. I know that the chances of this ever personally affecting me are slim to none, but theft is still theft, regardless of whether I do it, or whether I have the government do it. And with the amount of money they get every year, any tax increase is simply theft.

  18. Brad Says:
    June 11th, 2007 at 7:56 am

    plonkee,

    Military/defense spending is and always will be important, whether the average joe thinks it is or not. Defense is the single most important thing (far and away) that any government does. There is no way an individual taxpayer should be able to choose not to give to the defense budget.

    I’m cool with a flat tax above the federal poverty limits. That way, each household gets to keep a certain dollar amount of their income tax-free, and if you make more than that, it is taxed at a flat rate. Some Americans will continue to pay no taxes at all, but most would . . . and we’d all pay the same rate. If the FPL for your household size is $17k and you make $60k, then you’ll pay a flat tax on the difference. It’s a major simplification of the federal income tax and punishes no one.

  19. GLM Says:
    June 11th, 2007 at 8:55 am

    I agree with Brad. Those who are open to a flat tax above the poverty limits need to look into the Fairtax. ( Fairtax.org )

    It taxes everyone when they spend on new items only, and the really rich spend a lot more. It “prebates” the money you would spend on tax up to the poverty level so the poor are not harmed. In fact it eliminates the social security and medicare taxes so they don’t pay that either . (Social security and medicare are very regressive. ) It will tax visitors and those others who operate outside our regular economy, such as those who are here illegally or operate business “off the books.” also known as HR25 it is gaining bipartisan support.

  20. Brad Says:
    June 11th, 2007 at 9:07 am

    My dad is a huge Fair Tax fan. I’m open to the idea, and I do think it’s a “fair” form of taxation. My only concern is the potential econonmic effect of a large tax on new spending . . . it incentivizes spending less. While that’s great from a personal finance perspective, it may not be so good in terms of the economy, which depends largely on Americans continuing to spend money. I don’t know that we understand whether a change in behavior would occur or not . . . spending may even INCREASE since people will have more disposable income. That’s my main concern though, and we need to make sure that such a wholesale change in taxation wouldn’t adversely affect the economy.

  21. Joseph Says:
    June 11th, 2007 at 10:24 am

    You actually think they would abolish the Income tax if they ever pass the Fairtax? If you do I have some ocean side property to sell you in Arizona.

    Come on we all know the government can’t do anything right, but gain more power.

  22. GLM Says:
    June 12th, 2007 at 6:07 pm

    Joseph-
    It is written into HB 25 (the FairTax Bill) that the income tax is abolished FIRST. Anything else is just foolhearty!

    Brad-
    I believe the expert analysis (I’ve read a lot on the issue)that the economy would boom. Companys would be incentivised to relocate or stay here jobs would grow. wasted booking costs of the current tax system would be greatly eliminated.

Comments