Complicating the Federal Tax Code: A Look At the Alternative Minimum Tax
by Gary Robbins, Aldona Robbins on 03/12/1998
21 Pages
- Compliance costs amounting to $1.5 billion, or at least 30 percent of current AMT revenue make the AMT a very expensive tax to collect. Even worse, compliance costs are a dead-weight loss to society.
- Government forecasts wrongly assume that increasing either the corporate or individual AMT by a dollar raises a dollar. For every dollar the government expects to raise from increasing the corporate AMT by $1 billion, the total government sector picks up only 8 cents, and the economy foregoes $2.87 in GDP.
- For every dollar the government expects to raise from increasing the individual AMT by $1 billion, the total government sector picks up 47 cents, and the economy foregoes $1.72 in GDP.
- Taxpayer outcry is likely to get louder as more and more taxpayers will have
to deal with the extremely complex alternative minimum tax (AMT). Government
forecasters project that the AMT will hit 9 million taxpayers by 2007.
Calculating the AMT requires a taxpayer to compute his or her taxes twice.
Line 48 of form 1040 instructs the taxpayer how to determine whether he or
she may be affected by the AMT. If the AMT applies, the taxpayer must recompute
taxable income. Generally, the AMT results in the loss of tax
writeoffs and a higher tax bill.
Today the AMT affects less than one out of every 150 taxpayers. By 2007,
however, government analysts project it will affect one out of 14. Many of
those taxpayers will neither be “rich” nor have a lot of deductions. Why?
AMT exemption and bracket amounts are fixed and not indexed for inflation.
As nominal income increases, more becomes taxable under higher
AMT rates. More taxpayers, particularly the non-"rich," will have to pay the
higher alternative minimum tax.
As with individuals, a corporation must first figure out its taxable income
and tax liability under the regular income tax. It then must modify taxable
income under the AMT using a series of adjustments and preferences, requiring
about a dozen or more recalculations.
Another unfortunate property of the corporate AMT is that its burden is
greatest when the economy is weakest. The most revenue ever collected under
the AMT came during the 1990 recession. During recession, the income
growth of companies slows or declines. Tax liability likewise falls or net operating
losses are used to reduce future tax liability. Because the AMT denies
or reduces many deductions or credits, AMT liability is higher, triggering
AMT taxes. In other words, financially-pinched companies have to pay federal
income taxes at a time when they can least afford to do so.
It is easy to see why the alternative minimum tax is onerous to taxpayers.
But there are also consequences that carry over into the entire economy.
Here’s why.
Over the next decade, a backlash could result as one out of fourteen taxpayers
come under the AMT. The main reason for this expansion is because, unlike
the regular income tax, the AMT is not indexed for inflation. As the
Congress and White House consider tax cuts, they would well consider the
options discussed in this paper to scale back or eliminate the alternative
minimum tax.
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