AMT Will Distort Economic Efficiency Says CBO Report

by Mike Godfrey, Tax-News.com, Washington

20 April 2004

One in five US taxpayers will be dragged into the Alternative Minimum Tax system by the year 2010 if the law is not changed, a new report from the Congressional Budget Office warned last week.

The stated purpose of the Alternative Minimum Tax 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.

Until 2000, less than 1 percent of taxpayers paid the AMT in any given year. However, the CBO noted that under current law, the number of taxpayers affected by the AMT will grow from just over 1 million in 2001 to nearly 30 million in 2010, before falling back to about 23 million in 2014 after the expiration of the 2001 and 2003 tax cuts.

The report also warned that the growth of the AMT may have serious repercussions for the nation’s economic efficiency by subjecting taxpayers to higher marginal rates of tax, which in turn will influence how much individuals will work or save.

Ironically, the AMT is only partially successful in making sure that the wealthy pay their fair share of taxes, the CBO observed.

Whilst almost 1,100 taxpayers with adjusted gross incomes above $500,000 paid federal income taxes as a result of the AMT in 2001, nearly 900 people with similar incomes paid no federal income taxes at all in spite of the AMT.

One of the main criticisms of the system is that it is not indexed for inflation. The report estimates that linking the AMT to inflation will cost the Treasury some $370 billion in tax receipts over the period 2005/2014.

Eliminating the tax altogether would lessen tax revenues by around $600 billion over the next decade under current law.

Nevertheless, the CBO predicts that if the law remains unchanged, one-fifth of taxpayers including almost every married couple with an income of between $100,000 and $500,000 will become liable for the tax by 2010.

The growth of the AMT net was referred to by the Internal Revenue Service’s National Taxpayer Advocate, Nina Olson, as “the most serious problem faced by taxpayers,” in her 2003 report to the Congress.

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