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The Alternative to ‘Alternative Taxes’

Ninety-one percent is a “fascist tax rate,” period. And it happened to be the top marginal rate for the federal personal income tax right here in America until the mid-1960s. True, no one actually paid 91 percent. But to avoid paying statutory rates, like 91 percent, we must do as our overlords want us to do. We must buy a house on credit and buy an electric car and dance like a Russian circus bear if we want to knock our effective tax rates down to something a little less fascistic.

Tax rates are high because Congress wants to control us and to get us to do what they deem is best. Congress does this by offering the taxpayer a vast array of exceptions: the adjustments, deductions, exemptions, write-offs, loopholes, and such in the Internal Revenue Code that allow us to pay less to the IRS. But the exceptions had become so numerous and so large that it had allowed some high-income Americans to pay income taxes at scandalously low rates.

That situation might have even embarrassed Congress, because in 1982 they enacted the alternative minimum tax, or AMT. According to Table 1 (line 208) at the IRS, in 2013 there were 3,940,304 returns that had AMTs totaling $27.4B. The AMT was created for rich folks who took advantage of so many tax dodges, like tax-exempt municipal bonds, that in some cases they managed to entirely avoid paying income taxes. In other words, Congress created the AMT to counteract what Congress had created; i.e. the tons of exceptions in the tax code.

If you google “alternative minimum tax” in quote marks, you’re liable to get about 476,000 hits. However, if you google “alternative maximum tax,” you’ll only get about 922 hits. Why the disparity? It’s because the AMT is in the tax code, it’s in the law, whereas the alternative maximum tax isn’t. But the logic for the two is similar: just as taxpayers can be undertaxed, they can also be overtaxed.

Cato Institute has rerun a version of “The Alternative Maximum Tax” by Stephen Moore; it originally appeared on Jan. 14, 1997 in the Wall Street Journal. Moore’s article outlines what he calls the “MAXTAX,” which would be 25 percent for personal income taxes on the federal level. Even if you have your own ideas about how to reform income taxes, Moore’s article is well worth reading.

Like the AMT, the MAXTAX doesn’t replace the Tax Code. And if one looks at Line 45 of Form 1040, one sees that the AMT isn’t really an alternative to the regular income tax. Rather, it’s an additional tax that one adds to the tax reported on Line 44. But the MAXTAX would be a true alternative; one would pay the MAXTAX instead of the regular income tax.

On April 14, 2013, “Alternative Maximum Tax” ran at the blog of economist John Cochrane; it ran the next day at the Journal. In 2013, the Federal Reserve Bank of Richmond interviewed Cochrane on many issues, including ours:

The alternative maximum tax is not my favorite nor a perfect tax code. It’s a Band-Aid….

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