Wednesday, May 5, 2004
The Congressional Budget Office has released a report on the Alternative Minimum Tax, available in both html and pdf. Here is the Introduction:
For more than three decades, the individual income tax has consisted of two parallel tax systems: the regular tax and an alternative tax that was originally intended to impose taxes on high-income individuals who have no liability under the regular income tax. The stated purpose of the alternative minimum tax (AMT) is to keep taxpayers with high incomes from paying little or no income tax by taking advantage of various preferences in the tax code. The AMT does so by requiring people to recalculate their taxes under alternative rules that include certain forms of income exempt from regular tax and that do not allow specific exemptions, deductions, and other preferences. For most of its existence, the AMT has affected few taxpayers, less than 1 percent in any year before 2000, but its impact is expected to grow rapidly in coming years and affect about one-fifth of all taxpayers in 2010. In her 2003 report to the Congress, the Internal Revenue Service’s National Taxpayer Advocate, Nina Olson, labeled the AMT “the most serious problem faced by taxpayers.”
Unlike the regular income tax, the AMT is not indexed for inflation. The accumulating effect of inflation is a key source of growing AMT coverage.
The expanding reach of the AMT imposes costs beyond higher tax liability. Not only must taxpayers complete the regular income tax returns, but more of them will need to complete the AMT forms, whose definitions of taxable income, deductible expenses, and exemptions differ from those of the regular income tax. The required calculations increase both the complexity and time required to comply with tax laws, although computer software may mitigate those costs. Taxpayers’ potential liability for the AMT complicates many of their decisions beyond the tax forms themselves, including when to earn income and when to pay for potentially deductible activities.
A range of options could address the growth of the AMT. At one extreme, extending the exemption level in effect for 2004 would postpone the expansion of AMT coverage. The revenue consequences of doing so would depend on the duration of the extension: extending it just for 2005 would cut revenues by about $18 billion. Another option–indexing the AMT parameters for inflation–would prevent the alternative tax from growing simply because incomes keep pace with inflation and would lower receipts by $370 billion over the 2005-2014 period. At the other extreme, eliminating the AMT altogether would reduce revenues by nearly $600 billion over the next 10 years under current law.
The report was prepared by Roberton Williams of CBO’s Tax Analysis Division with the assistance of Kurt Seibert and David Weiner.
