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© TAX ANALYSTS. Reprinted with permission.
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The individual alternative minimum tax (AMT) operates parallel to the regular income tax, imposing a different income definition, allowable deductions, and rate structure. The AMT grew out of a minimum tax that first took effect in 1970, due to legislation enacted in response to public outrage in the wake of testimony by Treasury Secretary Joseph W. Barr (1969) that 155 high-income households had paid no income tax in 1966. Although it has historically applied to only a very small share of taxpayers, the tax is projected to grow rapidly over the next decade, transforming it from a class tax to a mass tax. The growth of the AMT will create problems of equity, efficiency, complexity, and transparency in the tax system. It will also inevitably force policy makers to focus more attention on the issue, in part because many reform options will prove expensive.
This column provides new projections of AMT taxpayers and revenues, and uses the projections to examine some broader implications for tax policy and the AMT. The results reported here update our previous work on the AMT.1 The updates incorporate the January 2003 economic projections from the Congressional Budget Office, the features of the Jobs and Growth Tax Relief Reconci liation Act of 2003 (JGTRRA), and a major update of the Tax Policy Center microsimulation model.2 In general, although the updates change the estimates slightly, the principal trends, conclusions, and concerns are similar to those found in earlier work. In particular, we find that:
- AMT coverage will skyrocket. By 2010, the AMT will affect 33 million taxpayersabout one-third of all taxpayersup from 1 million in 1999. This would make the AMT about as common as the mortgage interest deduction is today. The AMT will be the de facto tax system for households with income between $100,000 and $500,000, more than 92 percent of whom will face the tax.
- AMT expansion will encroach dramatically on the middle class. Households with income less than $100,000 will account for 52 percent of AMT taxpayers in 2010, up from 9 percent today. They will account for 23 percent of AMT revenue, compared with just 5 percent in 2003. In 2010, the tax will affect 37 percent of households with income between $50,000 and $75,000 and 73 percent of households with income between $75,000 and $100,000 (compared to about 1 percent for each group in 2002).
- The expansion occurs because the AMT is not indexed for inflation and because of the 2001 tax cut. Holding real income fixed, the lack of indexing raises AMT liabilities every year, while the tax cut reduces regular income tax liabilities. The 2001 tax cut will more than double the number of people subject to the AMT in 2010 (from 14 million to 33 million). If the AMT had been indexed when the regular income tax was and had the 2001 tax cut not been enacted, fewer than 300,000 households would face the AMT,
now or in 2010.
- By 2008, it would cost less to repeal the regular income tax (leaving the AMT in place) than to repeal the AMT.
- The AMT penalizes taxpayers who marry and/or have children. Couples will be more than 20 times as likely as singles to face the AMT in 2010. Because the AMT prohibits deductions for dependents, 64 percent of married couples with two or more children will face the AMT, 97 percent among those couples with income between $75,000 and $100,000. About 5.7 million taxpayers will face the AMT in 2010 simply because they have children.
- The AMT is notoriously and pointlessly complex. The Internal Revenue Service and the National Taxpayer Advocate have flagged the AMT as one of the most complicated tax provisions to comply with and administer. Most people required to fill out the AMT forms end up owing no additional taxes. The AMT also creates complicated interactions with the regular income tax.
- The AMT raises marginal tax rates. By 2010, the AMT will impose higher marginal tax rates than the regular income tax does for 93 percent of AMT taxpayers.
- The AMT reduces the number of high-income filers who pay no income tax. In 2003, an estimated 600 tax filers with incomes exceeding $1 million will avoid all income tax, but at least 2,700 would have if not for the AMT. But even if the goal of having every high-income tax return filer pay some income tax in each year is accepted, the AMT seems an extraordinarily cumbersome way to advance that goal.
- The AMT is poorly targeted. More than 90 percent of current AMT taxpayers face the tax only because they have dependent exemptions, standard deductions, or itemized deductions for taxes paid, medical costs, or miscellaneous expenses. These provisions have nothing to do with egregious or aggressive tax sheltering.
- Reforming the AMT will likely prove expensive and politically difficult. Repealing the tax would cost about $600 billion between 2004 and 2013 under current law. If the non-AMT provisions of recent tax cuts are extended permanently, AMT repeal would cost more than $1 trillion over the next decade, above and beyond the cost of the non-AMT extensions.
This article examines how a tax that was originally aimed at 155 taxpayers could grow under current law to target 33 million. Section II provides a brief discussion of the AMT. Section III presents new projections of AMT taxpayers and revenues. Section IV explores how the growing role of the AMT affects the equity, efficiency, and complexity of the tax system. Section V concludes. A companion column will address options for reform.
Notes from the Introduction
1. The earlier analysis is contained in Burman, Gale, Rohaly and Harris (2002) and Burman, Gale and Rohaly (2002). Other discussions of the AMT include: General Accounting Office (2000), Graetz and Sunley (1988), Gravelle (1988, 2001), Harvey and Tempalski (1998), Joint Economic Committee (2001), Karlinsky (1995), Leonard (1998), Rebelain and Tempalski (2000), Shaviro (1988, 2001), and Tempalski (1996).
2. Unless otherwise noted, all of the projections in this paper derive from the Tax Policy Center Microsimulation Model. The current version of the model is based on data from the 1999 public-use file produced by the Statistics of Income Division of the Internal Revenue Service (IRS). The file contains about 132,000 records with detailed information from federal individual income tax returns filed in the 1999 calendar year. A statistical match with the March 2000 Current Population Survey provides demographic and other information to supplement the tax data. The tax model has two components: a statistical routine that uses forecasts from the Congressional Budget Office, the IRS, and the Bureau of the Census to "age" or extrapolate the 1999 data to create representative samples of the filing and nonfiling population for future years, and a detailed tax calculator that computes the regular income tax and AMT liability for all tax units in the sample under current law and under alternative policy proposals. See http://taxpolicycenter.org/commentary/model.cfm for additional details.
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