House conservatives Wednesday proposed a new tax overhaul plan that would replace the Alternative Minimum Tax and allow taxpayers to choose to file under either the existing tax code or a simplified tax schedule.
Republican Study Committee Chairman Jeb Hensarling (R-Texas) said that the Taxpayer Choice Act would eliminate future tax increases and provide an alternative tax system that would be transparent, simple and efficient.
House conservatives got tired of waiting for the Democrats to reform the tax code, Rep. Hensarling said, and after President Clinton vetoed a previous attempt to repeal the Alternative Minimum Tax they realized they had to design their own plan.
Rep. Hensarling stressed that the GOP plan was not a tax cut, but a way of preventing massive tax increases in the future. He said that since World War II tax revenues have averaged 18.5% of the Gross Domestic Product, because of the Alternative Minimum Tax, taxes are projected to rise up to 25% of GDP in the near future if not checked.
The AMT was originally designed in 1969 as an add-on to the existing tax code, because liberals were upset that 155 very wealthy taxpayers had legally avoided paying any taxes. However, because it was not indexed to inflation, the Republican Study Committee projects that in 2007 as many as 70% of taxpayers with children earning from $75,000 to $100,000 will be subject to the AMT.
Under the AMT, taxpayers are required to calculate their taxes in two ways, under the existing code and the AMT, and pay the higher tax. The AMT is projected to impose $841 billion in taxes over the next ten years, according to the RSC.
RSC member Wally Herger (R-California) called the AMT “one of the worst mistakes Congress has ever made.”
The RSC sponsored Taxpayer Choice Act would allow taxpayers to choose between the existing tax code and a simplified schedule that would tax incomes at two rates: 10% for filers earning up to $50,000 for single and $100,000 for joint filers, and 25% for taxable income above these amounts with exemptions that would add up to $39,000 for a family of four.
Taxpayers would not be allowed to switch between choices yearly, but only on a one-time basis, and subsequently only in response to “life changes” such as divorce or death of a spouse.
The TCA would also make permanent the capital gains and dividend tax relief provisions of 2003, under which capital gains and dividends would continue to be taxed at a maximum of 15% after 2010.
House Budget Committee ranking member Paul Ryan (R-Wisconsin) said that under the TCA revenues and the distribution of the tax burden would remain the same as at present, so Congress wouldn’t be picking the winners and losers.
Though some RSC members took the opportunity to criticize the Democrats in general, and Rep. Charles Rangel (D-N.Y.) in particular, for failing to repeal or reform the AMT, Rep. Marsha Blackburn (R-Tennessee) said that this was not a Republican or a Democratic issue, but an American issue.