View Research by Author - David Weiner

Citation URL: http://www.urban.org/DavidWeiner

The individual alternative minimum tax (AMT) was originally intended to assure that high-income people paid at least some tax, but the AMT was poorly designed and affects more middle-income people every year. The AMT raises a lot of tax revenue, however: reforming or eliminating it could cost $500 billion over the next decade. Some suggest that the best option would be to make the AMT the regular tax system. This paper examines the implications of basing a reformed tax system on AMT rules. (A shorter version of this paper is forthcoming in the 97th Annual Conference NTA Papers and Proceedings.)

The individual alternative minimum tax (AMT) was originally intended to assure that high-income people paid at least some tax, but the AMT was poorly designed and affects more and more middle-income people every year. The AMT raises a lot of tax revenue, however: reforming or eliminating it could cost $500 billion or more over the next decade. Consequently, some suggest that the best option would be to make the AMT the regular tax system, rather than an alternative. This paper examines the implications of basing a reformed tax system on the AMT rules.

[© Brookings Institution] We examine retirement savers' choices between front- and back-loaded tax incentives, such as traditional and Roth IRAs, respectively. With equal dollar contribution limits, back-loaded plans shelter more funds than front-loaded plans. This implies that Roth IRAs can be the preferred choice even for investors who expect their tax rates to fall in retirement. Empirically, we examine how marginal tax rates have varied between 1982 and 1995 for a sample of taxpayers and calculate both ex ante and ex post effective tax rates on front-loaded IRAs. The average effective tax rate on traditional IRA contributions made in 1982 and withdrawn in 1995 was negative 30 percent. Changes in tax law after 1982 reduced tax rates considerably. Holding tax law constant, the average effective tax rate on IRAs was about negative 11 percent. These results occur because the tax rate in retirement is lower for most people than the rate while working. In contrast, the effective tax rate on Roth IRAs is always zero. Despite the lower average effective tax rate on traditional IRAs, many taxpayers in the sample would have benefited from contributing to a Roth IRA instead of a traditional IRA, due to the difference in effective contribution limits.

The personal alternative minimum tax (AMT) requires individuals to calculate their income tax a second way, different from the regular income tax. Separate tax rates and definitions of taxable income apply in each of these tax systems. This article explores the history and justification for the AMT, as well as the treatment of tax preferences in the AMT.

This paper examines the evolution of marginal federal income tax rates from 1980 to 1995. Those rates fell dramatically for most taxpayers. In 1980, three-quarters of taxpayers faced statutory tax rates above 15 percent, but by 1995, less than one-quarter of taxpayers were in that situation. The sharp decreases in rates in 1981 and 1986, which cut top statutory tax rates from 70 percent to 28 percent, were clearly the dominant factor. This is significant because the evolution of marginal tax rates over time is an important barometer of the efficiency of the tax system.

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