EVENTS

Date:	Monday, April 16, 2007
Time:	9:00 AM -- 10:30 AM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

April 2007

Options to Fix the Alternative Minimum Tax

The individual alternative minimum tax (AMT) is a tax system parallel to the regular income tax: taxpayers are required to pay taxes under the AMT whenever it yields a larger liability than the regular tax. Under current law, more than 20 million taxpayers, including many middle-class households, will pay the AMT this year, up from fewer than 4 million last year. At this event, cosponsored by AEI and the Urban-Brookings Tax Policy Center, economist Leonard E. Burman of the Urban-Brookings Tax Policy Center presented a paper that analyzes and compares twenty-three proposals to address the spread of the AMT. AEI scholars and tax experts Daniel Shaviro and Alan D. Viard offered legal and economic perspectives. The event took place at AEI on April 16, 2007.

Leonard Burman
Urban-Brookings Tax Policy Center

In 1969 Congress created the alternative minimum tax (AMT) to prevent tax avoidance by taxpayers, but almost forty years later, the tax is encroaching on the middle class. The AMT is not a flat tax; instead, it avoids targeting the highest income brackets in favor of upper-middle-class taxpayers. People become subject to the AMT because more than two-thirds of add-backs are state and local taxes and because of personal exemptions such as dependent children.

The AMT has grown significantly over time because it is not indexed to inflation like the statutory tax, and because President George W. Bush's 2001-2006 tax cuts lowered regular income tax but not the AMT, therefore subjecting more people to the tax. We depend on the AMT for substantial revenue and between 2007 and 2017, this amount will rise to $850 billion, excluding an extension of the tax cuts. If tax cuts are extended this amount will more than double.

The AMT adds pointless complexity to paying taxes, since taxpayers have to file papers even if they are not subject to the tax. By 2010, 90 percent of households will face higher marginal tax rates because of the alternative minimum tax. My paper presents twenty-three options for tax reform, including provisions to index the tax rate to inflation, allow state and local tax deductions, and target rate increases for upper tax brackets. The AMT has no policy merit, is inefficient and unfairly increases taxes on the middle class.

Daniel Shaviro
AEI and New York University

The AMT is a syndrome of broader financial instability. This instability is caused by the overall U.S. fiscal gap, as we spend increasingly more and the 2001 tax cuts sunset. In the long run, we need to address the fiscal gap and recognize that rates will rise at some time in order to offset the large spending. A scaled back AMT would be tolerable, but it is preferable to repeal it.

Arguments for the AMT revolve around political economics and the idea of a base-broadening as a result of the tax. Proponents also argue that the tax prevents the overuse of preferences. But this is not the way we are operating. We must understand that in the short term, fixing the AMT will be politically painful.

If we must keep the AMT, we have to keep it from growing and actually focus on base-broadening. In order to accomplish this, we must index the rate, allow higher exemptions, lower overall rates, and no phase-outs. We must also partially repeal deductions. There are two things wrong with the tax base: home-mortgage interest deductions and exclusions for employer-provided health insurance. The AMT needs reform, but not without paying attention to the widening fiscal gap.

Alan D. Viard
AEI

There are five broad issues in fixing the AMT: repeal versus reform, when to pay for it, whether to broaden the tax base or raise rates, the availability of other solutions, and what happens if no solution is found.

The AMT is a parallel system to our regular tax system. The AMT is thus flawed, because no country needs two income tax systems. The tax should be repealed because proposed reforms do not adequately address its flaws. The tax must be paid off today or the financial burden for the future will amount to more than $800 billion.

In fixing the AMT, we must avoid rate increases for certain tax brackets because that would only magnify the current system's distortions. Raising the capital gains tax is inefficient and unnecessary because it brings back a double tax on corporate income. The state and local tax deduction reform is important to base-broadening and is the best of Burman's reform options. The worst thing that can be done is postponing paying off the tax or leaving the tax in place as is.

AEI intern Jenna Lally prepared this summary.