Posted: Apr 27, 2005 By: Jeff Bash

Subject: Tax Reform Recommendation

Comment: Here is a simple and easy to implement plan for major tax reform/simplification:

1. Eliminate the Alternative Minimum Tax altogether.

The AMT applies to huge numbers of taxpayers and adds a minimum of 50% to the time it takes to do a return. It also exceedingly complicates tax-planning - when to make asset sales, when to make estimated tax payments, or other deductible expenses, whether to file jointly or separately (if married), etc.

The AMT also has the possibly unintended effect of raising the effective long term capital gains tax rate from the 15% statutory level by creating, or adding to, AMT tax when there are material amounts of long term capital gains (by reducing the AMT "Exemption" on line 29 of Form 6251), which AMT tax you would not have, or would be lower, in the absence of such long term capital gains.

2. The AMT "catches" 99% of the people affected because they have high itemized deductions. The simple solution is to eliminate the AMT and have in the standard tax calculation the 7.5% of income deduction against medical expenses or 10% against casualty losses be replaced by ONE percentage deduction against ALL itemized deductions combined excluding charitable contributions and investment interest (since the AMT does not now hit those items). In my opinion, the "one percentage" could possibly be in the 10% range to achieve revenue neutrality, although I obviously do not have the data to determine exactly what percentage would be required.

This change would have a number of benefits:

-Eliminate the very time consuming parallel AMT tax system.
-Encourage more people to take the standard deduction, which saves a lot of time.
-Replace the current strange and differing percentages of income subtracted from various types of itemized deductions (7.5% for Medical, 10% for Casualty, 0% for all other) with a single percentage (10%?) of income subtracted from all itemized deductions combined except charitable and investment interest.
-Be very easy to implement.
-Not disrupt in a major way employment in the tax preparation and advice industries.