Big tax reforms: Who'd pay, who'd save
What AMT repeal and a surtax on high-income filers would mean for everyone's tax bill.
NEW YORK (CNNMoney.com) -- If a tax-system overhaul proposed last week were to pass into law, there would be a substantial redistribution of the tax burden.
Those with incomes over $500,000 would bear the brunt of that shift, with tax bills that could grow by between 6 percent and 10 percent in 2008, according to an analysis by the Tax Policy Center of a proposal introduced last week by House Ways and Means Committee Chairman Charles Rangel (D-NY).
Currently, those making more than $1 million pay 18 percent of all federal tax revenue. Under the Rangel proposal, their share would rise to 20 percent.
Those making between $500,000 and $1 million account for 6.7 percent of all tax revenue; their share would rise to 7.1 percent.
For all other income groups, their share of the federal tax burden would remain the same or go down. Those making between $100,000 to $200,000 will see the biggest drop, from 25.4 percent to 24.3 percent.
The Tax Policy Center estimates that 57 percent of tax filers (86 million households) would get a tax cut under Rangel's bill in 2008, while 2.4 percent of filers (3.6 million households) would pay higher taxes.
Rangel proposed repealing the Alternative Minimum Tax (AMT) and imposing a surtax on high-income taxpayers to pay for that repeal. He also proposed a higher standard deduction for everyone and more generous tax credits for low-income tax filers.
The AMT was originally intended for the wealthy few. But because Congress never indexed for inflation the amount of income exempt from AMT and because AMT disallows a lot of popular tax breaks, tens of millions of middle-class taxpayers are at risk of having to pay it. By definition, if you're subject to AMT you will pay more in taxes than you would under the regular income tax code.
Current law assumes the AMT will be left unchecked. As a result, repealing the AMT combined with other proposals in Rangel's bill would lead to a decline or no change in tax bills for the majority of households making less than $200,000.
Provisions in Rangel's tax overhaul bill will not pass into law anytime soon, if ever, but they are expected to set the stage for the tax reform debate in 2008 and 2009.
In the meantime, Rangel introduced another bill calling for a one-year AMT "patch" that would shield 21 million taxpayers from having to pay the AMT on their 2007 taxes. In a party-line vote, the Ways and Means Committee passed that bill on Thursday.
The bill also calls for measures that would offset the $50 billion cost of the AMT patch, a move Democrats support and Republicans oppose.
Top Senate tax writers - who also must pass a patch bill - may not be able to get the votes needed in the full Senate to pass such a bill if it also contains revenue-raising measures, which Republicans contend are permanent tax increases to offset relief for taxpayers from a tax they never should had to pay.