The U.S tax system can be classified as progressive where tax rates increase with increases with taxable base or the gross income (Amico 2003, pp 14). The Internal Revenue Service (IRS) under the Federal Government defines gross income as any income from whatever source except for the items excluded by the state. Sources of income in this case include compensations such as service, income from insurance (except death benefits), interests, pensions, and annuities, gross profits from businesses, income from corporations, partnerships, trusts and estates, amongst others (Lymer 2004, pp 144). The state excludes death benefits accruing from life insurances, interests on specific local or state bonds, health insurances provided by employers, employer pension contributions and some other benefits provided by an employer.
The traditional tax code is determined by making adjustments in the gross income. These include business expenses, capital losses, retirement plan contributions, alimony payments, and education related expenditure. The difference acquired is referred as the Adjusted Gross Income (AGI). Once the AGI is determined, there are two choices; subtract itemized deductions or standard deductions, whichever is greater. Itemized deductions include, but not limited to, charitable contributions, medical expenses, interest on mortgages, local taxes etc. To get the taxable income, personal exemptions are deducted from AGI (Amico 2003, pp 23). From the IRS table, the marginal tax rate bracket for the taxable income is determined leading to the determination of gross tax liability. Credits are then subtracted from the gross tax liability, and the difference is the net tax. Net tax implies how much one expects as a refund or how much to pay as tax.
The difference between the two is that tax calculation requirements on IRS Form 6251 and Instructional Form 6251. The AMT ensures that taxpayers pay at least a minimum
possible amount of tax. It has a totally complete set of calculations from the traditional tax system (Hufbauer 2007, pp 75). The standard deductions, personal exemptions and itemized deductions do not apply in AMT. While calculating AMT various income taxes are added contrary to the regular tax calculations. In addition, some deductions are eliminated or adjusted downwards. Taxpayers who are subject to AMT pay the higher of the tax due under the two systems.
The differences between these two tax systems create a lack of uniformity in the America’s tax systems. Depending on the corporation that one works, the tax payers pay different rates and amounts of tax. To eliminate this difference, several suggestions have been made. Some scholars are of the opinion that the AMT system should be completely scrapped off others push for modifications in AMT while others think that modifying the current system of tax will solve the problem.
Limitations of the current tax system
Amongst the key advantages of the current tax system is on its scope. The system has a broad scope in coverage where people pay taxes based on their levels of income (Lymer 2004, pp 142). However, the system is limited on creating tax loopholes, which exist in the tax code system. This allows individuals and corporations to alter their financial and expenditure structures so that they pay the least possible amounts of taxes. This deprives the government of significant amounts of revenue, and in overall this affects the income distribution structures of the economy. In addition, this rewards taxpayers with sufficient resources, such as large business capital, which allow them hire a professional tax expertise that can assist in identifying and taking advantage of these loopholes.
Another substantial weakness of the current income structure in US is that it serves more as a disincentive rather than an incentive to operate in some regions, in the country. Some regions are taxed at higher levels than others, and this limits investments or business in some areas. High income tax rates in some regions influence some businesses or income earners to establish operations in other areas where income taxes are lower. This can also be associated to many businesses operating oversees, and making advantage of the loopholes operate in other regions, in the world.
The shortcomings in the current income tax create a threat to the economy’s prospected growth rates, and the affects stability in some businesses (Amico 2003, pp 68). The speculations in changes, in income tax rates, in some regions, have created a state where some businesses are underperforming or individuals being overtaxed. There is the need for review of this system so that there is uniformity in the country’s taxing system.
Proposal to handle these limitations.
Amongst the proposals brought forward in adjusting the current income tax system, is the idea that traditional tax code should be eliminated, and all tax payers subjected to AMT system. From the analysis of the traditional tax system and AMT provisions, this is what I would advocate the congress to adapt. Among the weaknesses of the traditional tax system are the loopholes, which cost the country a lot of income from the tax payers, which could otherwise be used for development (Lymer 2004, pp 142). In addition, the traditional system lacks uniformity where some people or corporations are taxed at higher rates than others. There is the need for uniformity in tax payments so that business operations can be opened in all sectors and regions of the economy.
Adopting this AMT system will mean modifying some concepts so that all sectors of the economy are covered, and the tax payers pay according to their levels of income. The Alternative Minimum Tax ensures that every tax payer benefits from tax by paying at least a minimum amount of tax (Hufbauer 2007, pp 73). It is an alternative to traditional income system and provides an alternative set of rules for calculating taxable amounts. It determines the minimum amount of tax, which every income earner should pay. If the regular tax falls below the minimum, then one has to make up by paying AMT. This requirement ensures that every tax payer meets the minimum level of taxes provided to avoid penalties that arise from falling below the minimum.
Advantages of adjusting AMT.
The advantage of subjecting all taxpayers to AMT over the other opinions raised in correcting the limitations of the current tax systems is that AMT is separately calculated figured tax. This ensures that deductions and credits, which could have otherwise been included in the traditional tax system. This increases tax liabilities of the taxpayers who would otherwise pay lesser taxes. This, in turn, impacts positive on the national income and overall national development. In addition, the tentative minimum rates under AMT are set and governed by law, and not by business, corporations or unions.
Adjusting these provisions would also imply reform alternatives, which would protect a significant percentage of middle and upper class tax payers from paying massive amounts of tax, and at the same time preserve the national revenue derived from tax (Amico 2003, pp 26). More than half of costs incurred while preparing AMT would also be reflected in tax cuts for the middle and low class tax payers. This would imply a fix that would target a relief to the middle income tax payer while its costs will be offset through other possible measures.
Amongst the proposals for adjustments is an extension to widen the current AMT patch, and index it for purposes of inflation. This would be better situated in reduce the tax burden to the middle earning tax payers. Another option would be to exempt all households earning below $200, 000 from AMT. under this definition, no household earning less than $200 would pay AMT. this will also benefit the low income earner, and also assist in the government’s objective of uniformity in wealth distribution.
Though this process would be expensive, it is substantially cheaper than the traditional tax system. It is estimated that continuing with the current personal income tax system would cost the economy $569 billion by 2017 (Lyon 1997, pp 65). Contrary if these tax cuts are implemented in AMT, more than $1 trillion would be saved from middle class tax payers.
Disadvantages of adjusting the current AMT system.
AMT started with an aim of preventing wealthy individual from paying fewer taxes as compared to their disposable income. Over the years, however, AMT has not been adjusted adequately for inflation purposes. This implies that it affects a significant number of people who should not be included under its cover. In most recent surveys, it is estimated that over 3 million people have been trapped in the AMT system, and there is no hope of getting out of this trap any time soon. AMT applies special rates ranging between 26 and 28%, which ensures equality of tax payments. Under AMT, tax calculations start with gross income (Lymer 2004, pp 145). However, the usual exemptions and deductions are not applied immediately. This makes the taxable income higher than the traditional income structure.
As in the above explanations, whenever tax liabilities are calculated under the AMT system, the amounts of tax payable are higher than in the regular tax system. This is the limitation in using the AMT system, and some modifications should be done so that the burden of tax is minimized to the low and middle class (Hufbauer 2007, pp 75). Some provisions for liabilities should be cut down so that the taxable amount is reduced to fit all social classes. There is the need to cut down or exempt on household tax liability for some classes in society. Reducing the household tax liability implies an increase in number of households, which owe AMT, as well as the total AMT. To make a difference between the regular tax system and AMT, however, the changes and tax cuts should be enacted together.
AMT has also been criticized on increases in marginal tax rates than the regular tax system (Lymer 2004, pp 146). Hugh marginal rates encourage avoidance of tax, and minimize savings. In addition, the key objective of AMT to limit tax sheltering was poorly targeted. AMT raises less than 5% of its revenue from anti-sheltering provisions such as oil depletion and depreciation allowances. However, the preferential treatment of capital gains, does not serve this purpose.
Calculating AMT is complex in the calculation and submission (Hufbauer 2007, pp 79). Taxpayers are forced to fill forms, which lead to increase in tax liabilities. This process complicates interactions with regular income taxes. AMT also reduces the number of high income tax payers who go without paying income tax. In 2001, for example, over one hundred tax filers earning over one million dollars failed to pay their taxes.
Planning tax strategies under AMT can be complicated and subject to many adversities among the wealthy. However, to achieve a standard and uniform tax, the AMT system is better placed as compared to other tax systems. With the recommended reviews in the current AMT provisions, the taxpayer is guaranteed of paying enough taxes to minimize events of tax overpayments, paying taxes when due to avoid tax burdens, and seek reimbursements where applicable. From an economical standpoint, it would only be wise for the congress to adjust the provisions in AMT so that the rates and payable taxes reflect on intended economic impacts, and on the number of people targeted.
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Amico, Joseph C. Introduction to the Us Income Tax System. Deventer: Kluwer Law and Taxation Publishers, 2003. Print.
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Hufbauer, Gary C, and Ariel Assa. U.s. Taxation of Foreign Income. Washington, DC: Peterson Institute for International Economics, 2007. Print.
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Lymer, Andrew, and John Hasseldine. The International Taxation System. Boston: Kluwer Academic Publishers, 2002. Print.
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Lyon, Andrew B. Cracking the Code: Making Sense of the Corporate Alternative Minimum Tax. Washington, DC: Brookings Inst. Press, 1997. Print.
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