Senior Fellow Kevin A. Hassett

We may be about to find out.

This week, the U.S. Senate Finance Committee will begin hearings to investigate how to repair the alternative minimum tax, the levy that was originally intended to make sure affluent Americans pay their fair share of tax, but which now threatens to ensnare much of the middle class. Absent some kind of fix, almost 20 million more tax returns will be forced into the AMT this year. Since many returns are for families filing jointly, the number of voters affected may be almost double that.

Congress knows how to put off this problem. A simple but costly change to the AMT law, called a patch in Washington, would stop the bleeding before it starts. The problem is, Democrats have vowed to obey a "pay-go" rule that requires them to find spending cuts or tax increases to pay for any tax changes they enact. The one-year cost of fixing the AMT is in the tens of billions of dollars, so paying for the patch is heavy lifting.

For taxpayers, this is real money, too. According to calculations by the Brookings-Urban Tax Policy Center, a family with $75,000 in income and four children would face almost $2,000 in extra tax absent a patch. Individuals with higher incomes will generally face higher taxes from the AMT.

Tax the "Rich"

A favored revenue-neutral strategy appears to be the combination of a patch for the AMT with a marginal-tax rate increase on those who are "rich." The problem with such an approach is that it will surely invite a veto by President George W. Bush, and insiders say the possibility of finding a veto-proof majority is close to zero.

Indeed, the Republicans find themselves in a fascinating tactical position. They could propose a sweeping AMT reform that includes an extension of the Bush tax cuts that are set to expire in 2010. Democrats would bristle, of course, but when tax policy comes to a halt, we would be nearing the end of the year without an AMT patch.

Democrats are in control of Congress, and it will be hard for them not to shoulder most of the blame if millions of voters suddenly find themselves mailing healthy chunks of their savings to the Internal Revenue Service in the middle of the 2008 election cycle. Sure, Bush might become more unpopular if he vetoes their AMT bill, but he can scarcely become less popular than he already is, and he's not running again.

An Easy Fix

The political atmosphere in Washington may be as poisoned as it has ever been, but the AMT problem is easy to fix in a way that should have bipartisan appeal. The key observation is this: most of the special items, such as the state and local tax deductions, that put taxpayers on the AMT mostly benefit wealthy people. After all, most ordinary folks don't even itemize.

Thus, if Congress is raising marginal tax rates to preserve the current system, they are effectively giving rich taxpayers money with one hand, when they allow them deductions, then taking the money back with the other, by raising marginal rates.

Talk about needless complexity. It is a fool's game, and it's not all that hard to stop. Just eliminate or cap the deductions.

To illustrate how beneficial that would be, the Tax Foundation recently estimated how big a revenue-neutral tax reduction you could fund by eliminating the big-ticket deductions and exclusions in the tax code.

That is, they imagined a world with no state and local income deduction and no tax exclusion for municipal bond interest. They found that eliminating those items would allow a proportional tax-rate reduction of about 31 percent. That would take the top tax rate down from 35 percent to 24 percent. They also found that eliminating the deductions took just about everyone off the AMT.

Too Bold

That was scored to raise the same revenue as the current code. In the real world, it would surely raise more as the low rates spurred economic activity.

Such a reform is too bold to be considered bipartisan, but the key observation is this: It's not difficult to conceive of a revenue-neutral reform that eliminates the AMT, drops tax rates by almost a third, and improves the overall efficiency of the economy.

In that case, it is child's play to conceive of half- measures necessary to eliminate the AMT and leave tax rates where they are today. Instead of eliminating the state and local tax deduction, for example, you could cap it at $10,000. The revenue gained from that could help you fix the AMT, without requiring marginal tax-rate increases.

If Republicans are smart, they will suggest such a major fix this year and stick to it. If Democrats are smart, they will be flexible. If they aren't, they just might find out what happens to a majority party when tens of millions of angry AMT-paying taxpayers enter the voting booths.

Kevin A. Hassett is a senior fellow and director of economic policy studies at AEI.