This article examines the economic benefits of alternative minimum tax reform relative to the current policy baseline. The authors find that AMT reform can lead to improved progressivity, greater efficiency, and a lessened compliance burden while raising an equal amount of revenue.
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In many ways, the alternative minimum tax has
evolved into as poor a tax as could be imagined. It
raises marginal tax rates (MTRs) on wages and
investment income for millions of taxpayers. It is
complex and rarely understood by those who pay
it, and often takes taxpayers by surprise. The AMT
doesn't affect the taxpayers it was originally designed
to tax and doesn't fulfill its original purpose
of ensuring that the wealthiest households pay at
least some tax. Instead, the AMT increasingly is
hitting those who either have children or live in a
state with high income taxes. These negative characteristics
led the national taxpayer advocate to
classify the AMT as one of the top problems facing
taxpayers and "the poster child for tax-law complexity."
But the AMT isn't all bad. It is progressive
through most of the income distribution, even
though the wealthiest tax units tend to escape it.
The AMT lowers MTRs on wages and investment
income for some taxpayers and it limits taxpayers'
ability to take deductions that some consider unjustified.
The AMT's biggest virtue is simply that it
raises a great deal of revenue — about $550 billion
over 10 years if the Bush tax cuts aren't extended
and $1.2 trillion over 10 years if they are (Congressional
Budget Office 2010).2
Although policymakers and economists understand
some of the threats posed by the AMT, there
has been little effort to propose reforms that both
maintain the revenue generated by the tax and
strengthen the role of theAMT as a "minimum tax."
Recent comprehensive reforms, such as Roadmap
for America's Future designed by House Ways and
Means Committee member Paul Ryan, R-Wis., and
the tax plan introduced by Senate Finance Committee
member RonWyden, D-Ore., and Senate Budget
Committee Chair Judd Gregg, R-N.H., propose to
eliminate the AMT rather than reform it; the 2005
President's Advisory Panel on Federal Tax Reform
reached the same conclusion. In the tax policy
arena, the two options for AMT reform appear to be
either comprehensive reform that includes repeal of
the AMT or the status quo of continually indexing
the AMT exemption.
In this study, we propose and analyze two alternatives
to the current system. The alternatives are
similar in nature: both establish a minimum level of
tax for income above a particular threshold. The
first alternative adopts a minimum tax rate of 20
percent; the minimum rate in the second alternative
is 17 percent, but the threshold is lower. The proposals
are revenue neutral compared with a current
policy baseline that includes extension of the 2001
and 2003 Bush tax cuts and continued indexation of
the AMT parameters at 2009 levels.
We find these alternatives to be superior to the
existing AMT. Reforming and simplifying the AMT
can lead to improved progressivity, greater efficiency
through lower MTRs, a lessened compliance
burden, more equitable taxation for taxpayers with
children and high state tax burdens, and better
fulfillment of the AMT's original role as a true
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