In the Tax Foundation’s new Options for Reforming America’s Tax Code 2.0, there are several options that would simplify tax law, including the elimination of the Alternative Minimum Tax (AMT). While this move would remove a source of complexity, policy makers should also consider reforming the deductions that justified the AMT in the first place.
The alternative minimum tax is a separate set of rules that requires some households to calculate their tax liability twice: once under normal income tax rules and once under the AMT. The AMT rules provide for a larger allowance but fewer tax breaks than the normal income tax system; the AMT can thus withhold more income tax from households that would otherwise claim high deductions under the normal system.
The Tax Reform Act of 2017 temporarily raised the AMT exemption and exit thresholds until 2025, resulting in lower AMT liabilities and fewer households with an AMT obligation.
The alternative tax system actually imposes lower marginal tax rates on labor than the conventional tax system. The AMT only has two tax brackets, one of 26 percent and the other of 28 percent. As a result, the abolition of the AMT would reduce economic growth. However, the tax foundation model does not take into account the compliance costs that a second tax system imposes on taxpayers.
|Static Sales (10 Years)||– $ 395.08 billion|
|Dynamic sales (10 years)||$ -436.17 billion|
Source: General equilibrium model of the tax foundation, April 2021.
The AMT compliance costs are significant. According to the Taxpayer Advocacy Service’s 2013 annual report to Congress, the AMT is doubling the tax burden on taxpayers who have to calculate their AMT obligation. In particular, this doesn’t just mean taxpayers who end up paying the AMT – many applicants have to find their AMT liability even if they still end up falling under the normal tax system.
In addition, the AMT treats certain deductions and credits differently and has different rules on assets than the regular tax system. In that 2013 report to Congress, the Taxpayer Advocacy Service found that a taxpayer would spread the cost of an office building under normal income tax over 39 years. However, under the AMT, they would have to write it off over 40 years instead.
In a 2018 paper, my colleague Erica York and I estimated that by reducing the number of taxpayers subject to the AMT, the 2017 Tax Act reduced compliance costs by between $ 4.6 billion and $ 8.5 billion Dollar has reduced. The lower estimate is obtained when using the median hourly wage in the private sector, the higher when using the median professional wage – the latter to take into account that AMT applicants typically have a higher income.
Just removing the AMT is second best. The AMT is intended to prevent individual taxpayers from reducing their taxable income too much. But why is that a political goal? If these deductions serve a purpose, it does not make sense to punish certain taxpayers for their behavior that the legislature has chosen as an incentive for the incentives. When these deductions do not make economic sense, policymakers should abolish these deductions instead of creating a separate tax system to punish individuals who benefit from too many at the same time. The proceeds from eliminating inefficient deductions could then be used to lower marginal tax rates, offsetting the economic impact of the AMT repeal.
Getting rid of the AMT is a good idea. But policymakers should also look at the myriad of tax regulations that prompted Congress to create the AMT in the first place.
Options for Reforming the US Tax Code 2.0
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