THE BLOG
11/29/2012 06:04 pm ET Updated Jan 29, 2013

Reform the Alternative Minimum Tax: An Innovative, Progressive Plan

In his first press conference following his reelection, President Obama said that he wanted to avoid the fiscal cliff and was open to "new ideas."

Well, President Obama, here's a new idea: reform the Alternative Minimum Tax (AMT) and then make it progressive. That is start with today's, current 29 percent rate but then increase it to 30 percent at $1 million -- and even higher rates thereafter.

On Monday, this idea was endorsed in the New York Times by none other than Warren Buffett. Buffett's desire for a 30 percent minimum tax at $1 million is so well known that it is called the "Buffett Rule." But Buffett now specifies that the AMT should increase to 35 percent at $10 million in reported income, including capital gains and dividends. All of it.

That is, he supports a progressive Alternative Minimum Tax.

The Alternative Minimum Tax is in need of reform. Today's AMT may capture over 20 million tax payers annually, which was never its intention. Buffett recommends increasing the income threshold for increased personal tax rates proposed by President Obama from $250,000 to $500,000. The AMT threshold could be increased to $500,000 as well -- and these adjustments then could be the basis for a compromise with the Republicans

I hope Buffett would agree with a couple of other tweaks: Index the AMT for inflation. The AMT needs reform because it is not indexed.

And rather than jump to 35 percent at $10 million, how about increasing the rate by 1 percent for each additional $1 million in income: 30 percent at $1 million, 31 percent at $2 million on up to 39.6 percent at $10 million. I know Buffett wants to keep this simple, but what's simpler than: you earned $2.5 million so your tax rate is 31 percent? Besides, this progressivity raises more revenue and gives those earning just over $10 million less incentive to manipulate the income that is reported.

I would then ask Mr. Buffett to consider this: apply this progressive AMT to corporations. Just as with the personal AMT, make this part of a compromise: reduce the top corporate rate to 25 percent in exchange for an AMT that begins, say, at 15 percent at $100 million in reported income and then increases by 1 percent for every additional $100 million topping out at 25 percent at $1 billion of profit.

Conservatives like to argue that corporate tax increases would hurt small business. Clearly, this proposal would not touch small business.

They also contend that focusing on the rich doesn't raise enough money to have an impact on the deficit. This is also false.

The personal AMT reform would raise more money than Obama's current proposal to increase the top rate from 35 percent to 39.6 percent for those earning more than $250,000 (they're not mutually exclusive, of course). And it begins to recognize the vast income differences between, say, President Obama who earns over $1 million and someone who earns nearly 20x more, like Mitt Romney. Should they pay the same tax rate?

The corporate AMT could generate over $100 billion annually to start. Within a few years, these two AMTs should be raising over $200 billion per year -- and by the end of 10 years, the standard for budget projections, much more.

Buffett also argues for corporate tax reform -- including getting rid of carried interest deductions as well as tax evasion from overseas sites like the Cayman Islands.

And, yes, the higher effective tax rates on rich individuals and corporations could be accomplished through an idea the Republicans have actually proposed: gradually eliminating income tax deductions.

But Congress will never eliminate all of the deductions -- whether charitable contributions for individuals or the oil depletion allowance -- so a comprehensive Alternative Minimum Tax is a necessity.

And a progressive Alternative Minimum Tax is an innovative plan. Uh... I meant to say it's a "new idea," President Obama.

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