NEW YORK (CNN/Money) - A senior government official charged with representing taxpayer interests came out in favor Tuesday of a tax overhaul -- one of the President Bush's top legislative goals heading into his second term.
In an annual report to Congress, National Taxpayer Advocate Nina Olson designated the "overwhelming complexity" of the tax code as the biggest problem facing taxpayers and the Internal Revenue Service.
Olson pointed specifically to the Alternative Minimum Tax (AMT), a controversial parallel tax system aimed at closing off tax loopholes for the wealthy but one that, for various reasons, is snagging more middle income wage earners every year.
Olson also singled out the earned income tax credit and provisions for education and retirement savings as especially problematic.
Olson called on the Republican-controlled Congress, which started a new legislative session Jan. 5, to abolish the AMT and to simplify the tax code.
The taxpayer advocate's report comes as Bush has put federal income tax reform near the top of his agenda. Bush on Friday appointed a bipartisan commission to come up with proposals for overhauling the tax code.
Led by former Senators Connie Mack, a Florida Republican, and John Breaux, a Louisiana Democrat, the new White House panel is expected to make a proposal later this year.
The National Taxpayer Advocate, which is part of the IRS but ostensibly independent, represents eligible individual taxpayers before the agency. Every year the advocate issues a report to Congress that identifies serious problems and outlines possible solutions for legislators to consider.
Congress, however, does not always heed the advocate's calls.
This is the third year, for instance, that Olson has proposed eliminating the dreaded AMT, which she calls "the proverbial elephant in the room."
The AMT, first enacted in 1969, increases taxes for qualifying individuals. While it is intended to close loopholes to force wealthy individuals to pay income tax, the income level necessary to be exempt from the AMT is not adjusted for inflation.
A quarter century ago, Congress set $30,000 as the exemption amount for all taxpayers. Factor in inflation, that amount equals $153,500 today, according to Olson. But under current law, the exemption for married taxpayers is only $45,000 and $33,750 for "most" other taxpayers, she said in her report.
The AMT over time is turning into a tax on the middle class. In calling for AMT reform or an outright repeal, critics argue that the tax no longer achieves the original goal of ensuring that the rich pay federal income tax.
According to the Tax Policy Center, a Washington, D.C. group that analyzes tax policy, some 3 million U.S. taxpayers will owe AMT for 2004.
While that's just 3.5 percent of all taypayers, the numbers are expected to skyrocket in coming years. Absent new law, some 30 million individuals, or 30 percent of all taxpayers, will be required to pay the AMT by 2010, according to the center, a two year-old organization formed by the Brookings Institution and the Urban Institute to analyze tax policy.
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