The Individual Alternative Minimum Tax: Historical Data and Projections

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Abstract

Congress enacted a minimum tax in 1969 to guarantee that high-income individuals paid at least some tax. The AMT now threatens to grow from a footnote in the tax code to a major component affecting tens of millions of taxpayers. Although most lower- and middle-income taxpayers will remain unaffected by it, policymakers need to deal with the explosive growth of the AMT from an obscure tax affecting only 20,000 filers in 1970 to one affecting more than 33 million–a third of all taxpayers–by 2010. This document provides updated estimates of AMT participation, revenue, and distribution.

Introduction

Congress originally enacted a minimum tax in 1969 to guarantee that high-income individuals paid at least a minimal amount of tax each year. Due to design flaws, however, the current alternative minimum tax (AMT) threatens to grow from a footnote in the tax code to a major component affecting tens of millions of taxpayers every year. One reason for the projected expansion of the AMT is that–unlike the regular income tax system–the AMT brackets and exemption are not indexed for inflation. In addition, since they reduce regular income taxes without a corresponding permanent fix to the AMT, the 2001-06 tax cuts exacerbate the AMT problem. Absent a change in law, more than 33 million taxpayers will be subject to the AMT by 2010. If Congress allows the tax cuts to expire at the end of 2010, the number of AMT taxpayers will fall dramatically in 2011, but will then trend back upward over time. By 2018, about 43 million taxpayers will be subject to the AMT under current law; that number will swell to almost 57 million if the tax cuts are extended. Although most lower- and middle-income taxpayers will remain unaffected by the tax, policymakers will need to deal with the explosive growth of the AMT from an obscure tax affecting only 20,000 filers in 1970 to one affecting more than a third of all taxpayers by 2010.

The Tax Policy Center (TPC) has written extensively about the AMT. This paper updates Rohaly and Leiserson (2006) with the TPC’s latest estimates of AMT participation, revenue, and the distribution of AMT liability. It starts with a brief overview of how the AMT works.

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