Background Paper No. 40
The corporate alternative minimum taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. (AMT) was enacted in its current form in 1986 in response to claims that many large corporations were making excessive use of deductions and other tax preferences to significantly reduce or eliminate their corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. liability. Meant to ensure that profitable corporations pay some income tax, the corporate AMT instead raises little revenue, distorts investment incentives and imposes heavy compliance
Over the last fifteen years, there have been many calls for the repeal of the corporate AMT, but until last year, none ever resulted in legislation that passed either house of Congress. On October 24, 2001, the House of Representatives passed, as part of a broad economic stimulus package, a provision that would repeal the corporate AMT. The Senate did not follow suit when it considered its own version of the stimulus bill, and in December the President removed corporate AMT repeal from the agenda in an ultimately unsuccessful attempt to get other provisions of the bill through Congress.
Current economic stimulus proposals would significantly reform, but not repeal, the corporate AMT. In 1998, the most recent year for which official data are available, 18,360 firms paid an additional $3.4 billion in tax because of the AMT. Future corporate AMT collections are likely to be lower, around $1 billion per year, due to significant changes enacted in 1997 that took full effect in 1999. In comparison, the regular corporate income tax raises about $200 billion annually.
The corporate AMT is a parallel tax structure, meaning that any firm that may be affected must keep separate records specific to the intricacies of the corporate AMT in addition to its regular tax and regular accounting records. This requirement and the inherent complexity of the corporate AMT make compliance inordiately expensive. In fact, compliance costs associated with the corporate AMT are likely to exceed net tax receipts.
The corporate AMT has significant economic effects beyond the high associated compliance costs. Due to its special rules governing depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment.
, foreign tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.
s, and net operating losses—all intended to capture more corporate income in the taxable base—the corporate AMT actually discourages investment and misallocates scarce resources. These distortions
ultimately result in fewer jobs, lower wages, higher prices, and slower economic growth.
Proponents of the corporate AMT, whether they recognize these distortions and costs or not, argue that the tax improves fairness, discourages investment in tax preferred assets, and is necessary to prevent corporations from using tax shelters to eliminate their income tax liability. It is not clear, however, that the AMT does improve fairness or limit the ability of corporations to avoid taxes. In any case, the corporate AMT is an extremely inefficient method of addressing these perceived problems. Much better would be to address policy concerns through the regular corporate income tax code and eliminate the complexity and inefficiencies associated with the corporate AMT.
The corporate AMT does not advance any legitimate purpose; that is, it does not increase efficiency or improve fairness in any meaningful way. It nets little money for the government—roughly $1 billion a year going forward. It imposes heavy compliance costs that in some years are actually larger than collections, and it encourages firms to cut back or shift their investments. The Congress’s bipartisan Joint Committee on Taxation was undoubtedly correct in recommending that it be repealed.Share